Buy-And-Hold good or bad? The debate continues

I wrote about buy-and-hold a few months ago, concluding that buy and hold investment is still a good strategy. But there seems to be a growing “cult” of buy-and-hold haters, I am not sure if these are converts or if buy-and-hold haters are just speaking out more.

Investors have lost a large amount of their investments over the last year, the S&P 500 dropped to 1997 levels wiping out 9 years of gains in the market, so many concluded that buy-and-hold does not work, even for long term investors. I must disagree with this conclusion.

First of all 10 years is a medium term for investment and if you look back at S&P 500 in the last 10 years (Jan 1998-Dec 2008) it did return a slight negative annualized rate of return of -1.44% adjusted for inflation. But let’s take a look at somewhat longer time frame from 1993 to end of 2008 annualized rate of return for S&P 500 was 4.08% adjusted for inflation, and if we look at real long term 20-30 years the returns are even better, 5.75% for 20 years and 6.61% for 30 years adjusted for inflation, and we had some high periods of inflation during these times.

By ignoring the media and actually looking at facts and unbiased information it is very clear that buy-and-hold has not failed investors and I do not see any reason for that to change in the future.

Fundamentals are key in buy-and-hold

Fundamentals are key when it comes to buy-and-hold investment. We will continue to have bull and bear markets; it is just part of the normal business cycle, but each investment has to be assessed on its fundamentals:

Is the Company still profitable?
Is the company expanding?
Will the products/services be in demand?

These are some key questions an investor should ask, and only if fundamentals have changed should the investment be sold and not because the market dropped 25%. If the reason you invested in a company is still valid why would you sell your investment? Should you buy more of it?

Good Fundamentals and Beaten down

Johnson & Johnson
Coca-Cola
Exxon Mobile
Vodafone
Any Canadian Bank
Manulife Financials
Proctor & Gamble

This is just a short list of companies who’s fundamentals are still strong and are beaten up in the downturn, there are many others.

Bad Fundamentals not worth investing:

General Motors
Many US Banks
AIG

These are some of the more obvious companies who’s fundamentals have changed and I do not consider good investment.

Of course some people will disagree with my assessment, but these are just a few examples.

What should a buy-and-hold investor do today?

Ignore media and buy good blue-chip companies with strong fundamentals. It’s that simple if you time horizon is 20-30 years than there is a sale going on and everyone is invited.

So before you start dismissing buy-and-hold and declare it dead, take a look at some historic data and try to make and unbiased assessment of the strategy you will realize buy-and-hold is a sound strategy and will continue to be one.

Remember to Stumble the post!!