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              #10 -  Buy And Hold—But Not Forever, Regardless

A recent feature in the Motley Fool newspaper column neatly explains the concept of buying and holding your investment.  An anonymous writer from Tarentum, PA, detailed his good fortune with a “buy and hold” philosophy.

“Back in the late ‘50s we bought 100 shares of PepsiCo.  We kept those shares through ups and downs and splits, and from the beginning we had all dividends reinvested in additional stock.  This is a good example of long-term investing.  Today that investment has become 22,000 shares of PepsiCo and 4,200 shares of its restaurant chain spin-off, Yum! Brands.  Their total value is about a million dollars.  My advice:  Hold onto good stocks if you can.---

Anonymous, Tarentum, PA.

“Motley Fool responds:  Wow---what a great example of buying and holding. Be careful with that approach, though---it doesn’t mean holding and forgetting, and not keeping up with your company.  Buy to hold, intending to hang on to your shares as long as you retain faith in the company’s prospects for long-term growth and success.  Some of this country’s wealthiest people made their fortunes by holding stock in great companies for decades.  Warren Buffet has said that his favorite holding period is “forever.”

However, in spite of the success stories like this one, today you may hear that “buying and holding” is just a relic of the great bull market of the 1990s.  There are those who feel that now, we are in a more dismal era where market timing is the only way to achieve satisfactory returns. 

Professor Jeremy Siegel from the Wharton School at the University of Pennsylvania, in his column in the Kiplinger magazine, states that he does not agree with this premise.   “The bear market did not discredit the buy-and-hold philosophy at all.  The long-term returns from owning stocks that are often cited include both bull and bear markets.”

Siegel adds that  market timing, short term speculation “is more akin to gambling than to investing.  Only a handful of traders do it successfully because it requires an enormous amount of knowledge of market trends and psychology, not to mention a healthy dose of luck.”    He adds, “The problem with market timing is that it opens the door for many investors to do far worse than the market averages.”  

“Too many people bought far too many technology and Internet stocks during the tech boom than a diversified-portfolio strategy would have indicated.  They are the ones who suffered the most.”  Siegal adds  that “The only form of market timing that is easy and automatic for most investors is dollar-cost averaging, which I wholeheartedly advocate. “

Dollar cost averaging is an investment strategy designed to reduce volatility  in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.  By investing a fixed amount at set intervals, the investor buys more shares when the security price is low and less when it is high, theoretically reducing the overall cost of the investment.

Siegel concludes, “The bottom line:  There’s nothing about this bear market that should dissuade anyone from patiently accumulating stocks through the years.  Those who do are guaranteed to become long-term winners.”

Motley Fool also concludes that it is best to think of buying to hold.  “In other words, never buy a stock and just blindly hold it for years without ever checking up on it.  Instead, carefully select promising companies, intending to hold for the long term as long as they remain healthy and promising.”