Buy-and-hold investment strategy, still work?

These days there has been a debate about whether or not a buy-and-hold investment strategy still working in today’s market environment. In my view, this question is not at all readily addressed by an simple yes/no answer.

To answer this question, first of all, you need to ask yourself what kind of investment return do you expect from the stock market. A well-diversified portfolio of stocks yields only 10-12% return annually. However, many of us expect 10% every month or 50-100% annually. If you are one of those people, buy-and-hold does not work for you. In fact, it has never worked neither in the past nor the present.

However, if you have a realistic expected return for a long-term investment portfolio. Can a buy-and-hold investment strategy be workable in today’s environment? Can we achieve 10-12% returns using some kinds of long-term investing styles at all?

The problem with today’s market is that central banks tend to inflate the economy using ultra low interest rate policy. The side effects of this policy is overvalued asset markets and frequent asset bubble bursts. In fact, I saw one study showed that in a ten-year period S&P500 was priced above its fair value justified by asset price theory almost of time except for a period of three months in the middle of the hamburger crisis.

Given this type of overvalued markets, chances are you buy stocks at inflated price and suffers big losses in the subsequent market crash. Since most people trade stocks on regular basis, the possibility of this scenario is very, very high.

So if you are like most people, I can assure you buy-and-hold strategy is very likely leads you to a disaster in today’s markets. Most people cannot resist the temptation to trade stocks on regular basis and they tend to give themselves reasons to relax their valuation principle in order to buy some stocks. 

Conversely. if you can wait until market crash so that you can buy stocks at reasonable price and hold it permanently, buy-and-hold is still a workable investment style for you as it has always been. And I am talking a period of inactivity as long as a couple of years or more. The good thing about buy-and-hold is that you can sit back and let the money work for you instead of stressfully and slavishly monitoring the market on hourly basis like traders do. The only quality that you must own as an investor is the ability to resist your own temptation to keep trading all the times. That’s it.

In sum, in order for buy-and-hold to work in today’s environment, you have to wait much longer for stock valuation to be justified. Also, you need to buy only good business with some future and buy a bunch of them to be successful with this strategy. If you cannot do all these things, do not use buy-and-hold. It will likely be the road to disaster. It’s perfectly fine to go for other short-term strategies that better fit your trading behavior such as trading, momentum, technical, etc.     Period.

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