A lot of people believe that buy and hold is dead and has been dead since the tech bubble popped, taking down the rest of the market with it.
I think just saying buy and hold is dead is too simple and dismissive. For investors, as opposed to traders, trying to construct a diversified portfolio for the long term they probably have some larger core positions and some smaller more volatile holdings. This method is common even if it isn't universal.
I think an approach to this issue that makes sense, even if it doesn't label very well, is to buy with the intention of holding. As time goes buy it may make sense to sell or reduce the name but you don't really know when you buy if you will ever need to sell.
When I first bought New Zealand Telecom in 2003 I thought it would be the type of name I would be able to hold for a long time. As time went on, things changed and I felt it was better to sell.
I think that the connotation that goes with buy and hold is that you can ignore what you own because "great companies always do well." Ignoring your holdings because of blind devotion is not something I would ever advocate.
There are other reasons to sell or reduce too. If you own a consumer stock that has doubled while the rest of the sector is up 10% in the same time frame might be a reason to reduce exposure. On the other side of the discussion if a stock is up 30% but so is its sector, selling may not be ideal.
It would be great if every stock you purchase does exactly what you expect it to and you never need to sell. I would be quite pleased with that. Of course it is unrealistic. If you own stocks you need to stay current with them and be accepting of the fact that you will need to sell a name or two every so often.
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6 comments:
FYI
Mutual Funds were once known for their ‘buy and hold’ investment strategy. In 2005 the average mutual fund held a stock position for an average time of 10 months!
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"Hold" is a misleading term. As opposed to "buy" or "sell", it sounds passive, as if you're not doing anything. But actually it represents a decision. Holding a stock essentially means that you think it is a better use of capital than other ideas you may be evaluating. If it is not, then you should sell it and put the money to work elsewhere. In this sense, "hold" should never mean "forget". You need to continually monitor your holds to see if the fundamental investment case is still compelling when compared with other opportunities. If not, it may be time to move on.
John - very well put. I agree that hold means hold if you think you can't do better. Of course, soon, the "I can do better" turns into an obsessive trading habit, and finally comes full cycle to "I will just buy and hold" after serious losses are sustained. If someone had bought E-Bay in Jan 2004 they could have made up to 100% in a year. However, since Jan 2005, their "hold" strategy would have led them back down to break even. While perfect entry and exit points are not attainable, all holdings need to be evaluated frequently to determine their risk/reward ratio at a given time.
Good post!
-- Faisal Laljee
I have asked my online broker to include an area on their site to allow me to write down just what my thoughts were when I made my decision to purchase an equity. My best idea in December could fall wide of the mark in June. I doubt that they will change website just for me but it is good idea nontheless. Tom in Indy
The watch word is proportionality;the proportion of high risk vs low risk positions, stock of the day trades vs absolute return funds. When the market is behaving nicely, I would have higher proportion of the former(higher risk, more stocks. When the market is behaving badly like now, I will slide to the safer more sure things. I believe if you are in the market you ought to be a active participant. I do use asset allocation butI don't stay with a fixed ratio.
High Alpha
I think that buy and hold is an invitation to become a lazy investor.
I'm happy if other people do that, it allows the more agile traders to take advantage of them.
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