Buy-and-Hold Has Not Been a “Good Enough” Strategy Over the Years

Buy-and-Hold Has Not Been a “Good Enough” Strategy Over the Years
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Valuation-Informed Indexing #355

By Rob Bennett

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One of the arguments that you sometimes hear for Buy-and-Hold is that, while it may not be a theoretically pure strategy, it has been a “good enough” strategy over the years. Millions of investors have employed some form of Buy-and-Hold strategy and have achieved results with which they are pleased. So it works.

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I don’t buy it. I say that Buy-and-Hold never works. What I mean by that is that, for the entire 147 years for which we have good records, investors who shifted their stock allocations in response to big changes in valuations have done better in the long term than investors who failed to do so. Valuation-informed investors obtain higher returns (often significantly higher returns) in about 90 percent of the cases that have been examined in the research. And in the rare cases in which the Buy-and-Holders have put up better numbers, they have had to take on significantly more risk. So, on a risk-adjusted basis, Valuation-Informed Indexing has always prevailed.

That said, I don’t deny that millions of Buy-and-Holders have obtained good results. My view is that that is mostly because Buy-and-Hold calls for a large investment in stocks and stocks are an amazing asset class. It is hard to come up with a strategy that produces poor long-term results from an asset class that generates an average long-term return of 6.5 percent real. So I don’t think that the Buy-and-Hold strategy should be given the credit for those results. Stocks should be given the credit. The core Buy-and-Hold idea -- that investors should stick with the same stock allocation regardless of how high stock prices rise -- does much harm to the investors who buy into it.

Say that we were trying to determine whether it is a good idea to smoke. Those seeking to make a case for smoking could point to millions of people who smoked and lived long, fruitful, exciting lives. That’s not an endorsement of smoking. It’s a showing that many people are so full of love that they can make successes of their lives even while their smoking habit holds them back a bit. Smoking is bad and Buy-and-Hold. But there are of course successful smokers and successful Buy-and-Holders.

The question is -- Does refusing to change your stock allocation when the likely return on stocks changes dramatically add anything to the investing experience? It is my contention that it subtracts a great deal and never adds a thing.

Here are eight ways in which following a Buy-and-Hold strategy holds back those following it. 

1) Those who refuse to adjust their stock allocations in response to big valuation shifts obtain smaller long-term returns;

2)  Those who refuse to adjust their stock allocations when rising prices make stocks more risky thereby cause their risk profiles to go out of whack;

3) Buy-and-Hold strategies make investing a more emotional experience. Valuation-Informed Indexers are indifferent to whether prices go up or down because they understand that excessive price increases must be paid back with lower returns in future years. So there is nothing for Valuation-Informed Indexers to get emotional about;

4)  Buy-and-Holders cannot engage in effective financial planning because they never know the true, lasting value of their portfolios. Valuation-Informed Indexers adjust their portfolio values to reflect the effect of valuations. So they always know where they stand. That helps them make effective spending and saving decisions;

5) Buy-and-Holders are not able to buy stocks heavily when they are on sale because they suffer big losses in the price crashes that bring on low prices. Valuation-Informed Indexers are well-positioned to buy stocks when the long-term return on them is the highest because they cut back their stock allocations when prices are high and the risk of crashes is the greatest;

6) This means that Valuation-Informed Indexers end up owning more stocks over the course of an investing lifetime. Stocks are a great asset class. So that is a good thing;

7) Buy-and-Hold causes economic crises. When trillions of dollars leave investors’ hands in crashes, they are not able to spend as much on goods and services and businesses fail. The economic crises of course affect all investors, both those following Buy-and-Hold strategies and those not doing so. But it is the resistance to exercising price discipline encouraged by the Buy-and-Hold strategy that causes crashes. So I think this needs to be counted as a negative for this strategy;

8) The key to long-term investing success is having enough confidence in your strategy to stick with it through good times and hard times. It is hard for Buy-and-Holders to develop a true confidence in their strategy because it defies common sense to believe that price matters with all the goods and services that we buy except for stocks. It takes some time for Valuation-Informed Indexing to click with investors who hear Buy-and-Hold endorsed in so many places. But once it does click, it clicks hard. Valuation-Informed Indexing makes sense.

Rob’s bio is here.


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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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  1. “You’re the one showing emotion in your comments, Sammy.”

    You are the one making attacks. You want to blame someone for your failures. In addition to your endless diatribes on buy and hold, just look at your website. You call people “goons”. You tell people they are going to prison. You call Jack Bogle a con-man. After Wade Pfau rejected you, you sent out over 30,000 emails on him, despite him asking you to stop. You have had such an obsession over John Greaney exposing your errors and lies, that you even pretend that you are responding to him on your website.

    “That’s the story here. ”

    The “story” is your non-stop attack on everyone else for your own retirement plan failure. No one did this to you. It was all you.

  2. You’re the one showing emotion in your comments, Sammy.

    I am the one rejecting Buy-and-Hold. Buy-and-Hold was developed at a time when it was believed that the market is efficient. Shiller showed in 1981 that that is not so. So I don’t follow Buy-and-Hold. I look at both the pre-1981 research and the post-1981 research in deciding what strategy to follow.

    Can you identify 10 changed that Bogle made to Buy-and-Hold in 1981? Shiller has described his research findings as “revolutionary.” He was awarded a Nobel prize. So I think it would be fair to say that there should have been at least 10 changes to Buy-and-Hold made in that year.

    Valuation-Informed Indexing is Buy-and-Hold updated to reflect the last 36 years of peer-reviewed research. I can easily identify 10 differences between Buy-and-Hold and Valuation-Informed Indexing. I made the changes that Bogle and the other Buy-and-Holders failed to make.

    That’s the story here. It’s all a question of whether we should update our strategies when we learn new things or whether we should pretend that we always knew it all and that we never need to make changes. I think this stuff is important. I think we need to keep our strategies up to date. Buy-and-Hold is in the year 2017 the same thing it was in the year 1980.


  3. You seem to ignore things as well as interpret things the way you want. Despite this, we can all look at the record. You failed at timing and the buy and holders have been successful. You need to get over your emotions. It is hurting you.

    Shiller warned you about using his data to time the market. He also told you to continue holding stocks, but you didn’t listen. You only have yourself to blame.

  4. I believe that the last 36 years of peer-reviewed research is legitimate research, Sammy.

    Shiller showed in 1981 that valuations affect long-term returns.

    I wish you all good things.


  5. We all know you are a market timer. You post on it constantly. We also have you investing history. We have all had a front seat watching your plan fail. You are the one responsible for your own failure. Stop trying to blame the buy and hold boogie monster.

  6. I was once a Buy-and-Holder myself, Sammy. I love the concept.

    I gave it up when I saw how emotional Buy-and-Holders get when their ideas are challenged. I just don’t think that emotional is the way to go. I am looking for investing strategies that help investors overcome their negative emotional inclinations, not strategies that make them MORE emotional. I believe that investors are less emotional when they keep their risk profiles roughly constant over time.

    My best and warmest wishes to you in any event.


  7. If you market time, you are not a buy and holder, simple as that. You will fail timing the market, just like you did.

    Making stuff up doesn’t help. Telling people you authored a study, when you did not is lying and hurts your credibility.

    I go with the facts, Rob. I look at what the documents and studies say. I don’t just make it up like you do.

  8. We have 147 years of stock market history available to us for review, Sammy. During that time, the Buy-and-Holders have never once responded to a secular bear market in the way that they must respond to them for Buy-and-Hold to work for the long term. Not once. The peer-reviewed research that I co-authored with Wade Pfau shows that following a Buy-and-Hold strategy always dramatically increases risk while also always dramatically reducing returns.

    It’s not for me, Sammy. I acknowledge that you ate in good company following a Buy-and-Hold strategy. Millions of good and smart people swear by it. And I certainly wish you the best of luck with it. But it’s not for me. I cannot recommend it for others because I don’t believe in it myself. The 147-year record of failure is a deal-breaker for me. I believe that the 36 years of peer-reviewed research showing that valuations affect long-term returns is legitimate research.

    All that said, I naturally wish you the best of luck in all your future life endeavors.