Buy-and-hold is back!*

Or so it would seem.  The stock market has returned to levels not seen since Lehman Brothers imploded.  This makes those members of the buy and hold crowd who held through the credit/economic crisis look smart.  Or at least lucky.

Steven Goldberg at Kiplinger’s highlights this line of thinking.   He notes that for quite some time that the critics of buy-and-hold were able to punch holes in this approach.  Now he writes:

Staying invested in stocks through the catastrophic bear market took superhuman nerves, but buy-and-hold investing has just about been vindicated.

The operative word at this point being “superhuman nerves.”  Holding through the bear market would have required a level of faith few people possess, in part because few people knew (or believed) that a decline in the stock market that saw was possible.  To add insult to injury, jumping to another strategy at any point since February 2009 would likely have been a losing proposition, to boot.

At the Systematic Relative Strength blog they have a piece up discussing the endowment model as practiced by David Swensen at Yale University. Their point being that “flipping strategies” in the face of adversity rarely works.  What works is something else entirely:

Ultimately, Mr. Fox’s point is universal.  It is applicable to Yale’s endowment model, but also every other disciplined investment strategy, including Warren Buffett’s.  You have to first do your homework and then stick to your guns.  There will be challenges along the way, but you’re likely to come out ahead if you can stay focused on a winning strategy.

Here the emphasis being a focus on a strategy that has an edge.  Recently many have argued that the equity risk premium is far lower than previously thought.  If so, that makes the edge from a buy-and-hold strategy even thinner.  However the upside of a buy-and-hold strategy is that should help eliminate the decision-making challenges of alternate approaches.  As we wrote back in October in a post entitled: Buy and hold the best of a bad lot?

The thrust of these articles is that buy-and-hold is decidedly flawed, but it may makes up for it by allowing investors to make fewer decisions.  That is a good thing, because for most investors decision making is an experience fraught with potential error.  As William Bernstein notes that “ more than a few percent of the population is qualified to manage their own money.”  If that is truly the case then a buy-and-hold, or “strategic policy with re-balancing” may be a sub-optimal strategy that may turn out to be the best solution for the vast majority of investors.

The bottom line is that few people who were consciously (or unconsciously) following a buy-and-hold strategy back in 2007-08 were prepared for 50%+ drawdown, as measured by the S&P 500.  If you were one who sold their equity holdings in the teeth of the crisis you may very well be investing by the seat of your pants.  If so, now may be the time to reassess your investment philosophy.

*See our earlier piece on the return of buy-and-hold investing.