What I failed to mention in this tweet is that in order to earn that 93% gain, an investor would have had to first endure a 45% loss. There’s always a catch when looking back at historical market data.
One of the responses I received on this was that it’s impossible for an investor to ride it out in this type of scenario. I understand the sentiment here. It’s gut-wrenching to watch your stocks get cut in half. Most investors can’t handle those kinds of losses. Buy and hold is not for everyone, but for those who are able to extend their holding period, that’s a good thing. The fact that so many people feel that a strategy is impossible to pull off is the exact reason that it works over time. This is true of any successful, long-term approach.
Long-term is the key phrase here. Everyone wants to be a buy and hold investor during a bull market, but people change their tune when losses set in. For this strategy to work you actually need those weak hands. You need people to be non-believers. And there are always skeptics when it comes to buy and hold. When the market takes a beating, other investors are quick to point out the huge losses and when the market is soaring, other investors are quick to point out the fact that it won’t last forever.
In 2009, when no one, I repeat NO ONE, was predicting that stocks would end up at the levels they’re at today, Jason Zweig talked about the paradox of buy and hold at a time when many had completely given up on it:
But maybe it’s fine that buy-and-hold is out of fashion. To prevail as a successful long-term investing strategy, buy-and-hold has to go through a prolonged period when it no longer seems to work. As its weakest believers give up and fall away, buy-and-hold will ultimately emerge stronger. That may take a while; the rewards to patience are not always measured in years, but sometimes in decades or even generations.
I’m sure Zweig had no idea stocks would go on to more than double at the time time he wrote this. But that’s the nature of a long-term investment philosophy — sometimes you’re surprised on the downside and sometimes you’re surprised on the upside. You take the good with the bad.
Buy and hold feels easy right now. While some have failed to let go of their mindset from the financial crisis, others seem to have completely forgotten about how difficult it was to invest during that period. This is especially true if your plan called for you to continue to buy stocks as they did nothing but fall day after day. I covered the nature of a buy and hold investment strategy in my book with the following:
This isn’t to say that buy and hold is a perfect strategy by any means. It’s not. No strategy is perfect. Just because something is hard doesn’t mean you shouldn’t do it. The problem with a buy and hold strategy is that for it to work the way it’s supposed to, you have to do both the buying and the holding during a market crash. It’s much easier to both buy and hold when markets are rising. Get this right and you can be wrong in many other aspects of the investment process and still succeed.
Buy and hold isn’t for everyone. For those that choose to utilize this strategy, maybe that’s a good thing.
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