Rumors of the demise of ‘buy & hold’ investing are greatly exaggerated, to say the least.
Purveyors of market timing would like us to believe that this investment strategy is no longer relevant to the pandemic-dominated market environment.
Stocks have continued to push higher in the face of various challenges, ranging from newer and more virulent Covid strains to supply-chain challenges and inflationary pressures. Even the Fed’s changed posture has not been able to weigh on sentiment negatively, taking most of the major indexes to near record levels.
The resulting stock market investing experience for the thousands of new investors that entered the market during the pandemic has been nothing short of heady. With this all-around sentiment positivity lifting most stock market boats, investors are at risk of reaching the wrong conclusions from their recent success and discarding long-held investing beliefs, including the virtues of ‘buy & hold’ investing strategies, as no longer relevant.
It is important to remember that long-term investing, particularly a ‘buy & hold’ approach, remains as relevant today as it has ever been. And notwithstanding naysayers’ claims to the contrary, empirical evidence continues to show the long-term superiority of a ‘buy & hold’ strategy over any other investing approach.
But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:
1) ‘Buy & Hold’ Doesn’t Mean ‘Buy & Forget’
Staying engaged with your portfolio is a must. Investing for the long run doesn’t mean that you lose sight of developments in your portfolio. The ‘buy & forget’ mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.
Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what’s happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the ‘buy & hold’ investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well informed of what is going on with each of their holdings to make sure that the primary reason(s) why they picked the stock(s) was still valid. This helps them avoid unnecessary changes.
Let me give you an example from the Top 10 Stocks for 2021 portfolio that follows a calendar year ‘buy & hold’ strategy. The portfolio did extremely well, outperforming the broader market more than 9 percentage points through December 10th. But one of the 10 stocks, Macy’s (M), lost more than a quarter of its value over a one-week period in mid-March 2021.
I didn’t ignore …….