Introduction to Buy-and-Hold Investing

I advocate that you should buy-and-hold stocks for the long run. Your alternative is to repeatedly buy stocks at low prices and sell them at higher prices. If this were easy to do, I would encourage you to do it. But prices move up and down in patterns that are difficult to understand unless you judiciously study charts and perform detailed technical analysis of price patterns. And even then it's difficult to consistently"time" your transactions so you make money. I made my living trading stocks for years so I know it's tough to do.

Therefore, I recommend that you buy well managed dividend-paying companies, index funds or low-fee managed mutual funds and hold them for a long time. If you have 10 or more years, you can wait out declines in price and hopefully sell your stocks for a profit when you need the money.

The stock market peaked in 1929 before it crashed and sank over 90 percent. This investor waited out the 1929 euphoria and subsequent crash and bought in 1932 after the market had found a bottom. The following chart shows how the investor's $1,000 investment grew.

When the investor was 75, the portfolio was worth over $10,000 and growing. Yes, there were significant fluctuations in value as the DJIA prices moved up and down but this investor experienced real wealth creation.

I know of a friend of a friend who is 100 years old. The value of her portfolio of blue-chip stocks is in the low seven figures. Suppose she had invested $1,000 at age 50 in 1953. The next chart shows the spectacular results of buy-and-hold investing.

At the market peak in 2000, the $1,000 had grown to over $40,000. Even with the price decline since the peak, she still has over $25,000.

The previous two examples showed the benefits of buy-and-hold investing. When you buy at a reasonable price and prices are in a long-term up trend, you can make a lot of money.

But what happens to your returns if prices move down for a long time after you buy? The Japanese stock market provides data for such a case. Assume you wanted to diversify your stock holdings to include foreign stocks so in 1993 you invested in the Nikkei 225, the Japanese market equivalent of the DJIA. You knew the N225 had peaked in 1989 at 38,916 and you thought the subsequent decline in price to 17,024 gave you a great buying opportunity. So at age 50 you invested $1,000. The next chart shows the ensuing disaster.

As of the February 2003 close at 8513.54, the investment was worth $500. Buy-and-hold investing for this downside price pattern was a mistake. Even dollar-cost averaging would not have averted a disaster because prices kept falling.

Conclusions and Recommendations

No one knows what stock prices will do in the future. I assume that the U.S. economy and the U.S. stock market will trend to the upside for the long run. If this assumption is correct, a long-term buy-and-hold strategy will make you money. If not, you'll lose money.

For more information about buy-and-hold investing read Buy-and-Hold: Your "Long Run" is the Only Important One.

See Buy-and-Hold Investing Dead? Not Necessarily for buy-and-hold winners and losers.