Three Reasons I’ll Never Be a ‘Buy-and-Hold’ Investor

By TradeSmith Editorial Staff

If you’ve been a Money Talks reader for long, you know I don’t always agree with the conventional wisdom on investing and finance.

For example, I think the way most people use and think about debt is foolish. And I think 99% of mutual funds are expensive garbage.

But if I had to pick just one piece of traditional advice that upsets me, it would have to be the recommendation to “buy and hold” investments for the long run.

In short, I think buy-and-hold investing is a terrible idea for most individual investors most of the time (there is one exception I’ll explain in a few minutes).

And there are three main reasons. Let me explain.

Reason No. 1 — Lack of Discipline

The most important reason is also the simplest: Most folks don’t have the emotional discipline to buy and hold successfully.

Now, this isn’t meant to be a criticism of ordinary investors. I certainly count myself among them.

It’s simply a fact of human nature. We’re emotional beings, and emotion is the enemy of traditional investing.

Research has proven this conclusively.

The majority of individual investors — most of whom would likely consider themselves “buy and hold” proponents — dramatically underperform the market.

That’s because these folks actually end up buying and selling frequently in practice.

But rather than use a systematic approach — like we recommend here at TradeSmith — they allow their feelings to dictate the timing. And that tends to result in buying and selling at the most inopportune times.

Rather than buying low and selling high, they tend to do the opposite. They tend to buy high when they’re feeling confident or greedy. And they tend to sell low when they’re scared.

Training and practice can help. But in my experience, only a relative few manage their emotions well enough to be successful when following a long-term, buy-and-hold approach.

However, even if you are able to develop the discipline to buy and hold, this approach still comes with a couple of serious risks that make it unsuitable for many folks.

Reason No. 2 — Risk From Severe Market Turmoil

One of the common talking points for buy-and-hold investing is that “the market always goes up over the long run.”

This is technically true. But what this platitude leaves out is that the “long run” can sometimes be longer than you might imagine.

Today’s investors are spoiled. We’ve certainly experienced some serious turmoil over the past several decades, including the 1987 “Black Monday” crash, the dot-com bust in the early 2000s, the financial crisis in the late 2000s, and the COVID-19 crash in 2020.

But none of these crises or bear markets lasted more than — at worst — a few years. And outside of these events, stocks have generally been on a one-way trip up in that time.

That hasn’t always been the case. If we step back and take a longer-term view, we’ll see that some bear markets have been much more serious.

One example is the bear market of the 1960s and ’70s.

As you can see in the S&P 500 chart below, the overall market essentially went nowhere for 14 years, between 1966 and 1980 (highlighted in red).

Now, this wouldn’t have been the end of the world for younger buy-and-hold investors. They had plenty of time to wait for the market to recover before they needed their money for retirement.

But it would’ve been much more difficult for folks who were at or near retirement.

Take another look at the chart above and imagine what it would’ve been like if you had retired in the late ’60s or early ’70s.

As a buy-and-hold investor, you would’ve watched helplessly as the dollar value of your savings plummeted, then rebounded, then plummeted again for years.

Even if you managed to avoid panic-selling during the frequent declines, the stress and anxiety of potentially running out of money in retirement likely would’ve been overwhelming.

But the reality was even worse.

Remember, inflation was also running rampant for much of that time. So nominal prices don’t tell the whole story.

If we look at a chart of the S&P 500 priced in gold, which helps account for the loss of purchasing power due to inflation, we can see that buy-and-hold investors actually did much worse in that 14-year-period.

By this measure, stocks lost as much as 95% of their real value over those same years.

If and when we do experience an extended bear market, I would much rather put my money in assets that are performing well — even if that means simply holding cash — than wait and hope for stocks to come back.

Reason No. 3 — Unexpected Risk From Individual Companies

Even dominant and successful companies can occasionally falter.

It might be due to new, disruptive technologies that make their products or services less useful or even obsolete, changing consumer preferences, management missteps, or outright fraud.

However, as individual investors, we often don’t have complete access to information; we can’t always know in advance whether a stock is cheap because of a minor hiccup or because of one of the more serious issues I mentioned.

Many investors learn this lesson the hard way.

A stock they own suddenly plummets for seemingly no good reason.

Rather than sell or simply wait to see what happens, they buy more. They may even continue to double down as shares move lower and lower.

By the time they discover something serious has happened, shares are worth a tiny fraction of what they paid.

In fact, if you’re anything like me, you may still be holding on to a “cheap” stock or two you bought years ago that has fallen so much it’s no longer even worth selling.

Rest assured, I don’t do that anymore.

Now, don’t get me wrong. I still love to buy stocks when they go “on sale.”

But I always want to see an uptrend and healthy momentum before buying. And I won’t hesitate to sell a stock if it begins to perform poorly and triggers its trailing stop loss.

If you’ve struggled to make money with a buy-and-hold approach, I would encourage you to consider doing the same.

One Potential Exception

Earlier I said the buy-and-hold approach is terrible “most of the time.”

There is one caveat — one situation where buy-and-hold could work.

It involves what I like to call “forever stocks” held in a well-balanced portfolio. These are a select group of the very best, highest-quality businesses in the world that are likely to be around forever.

Even with high-quality stocks like these, you must have a plan for how long you intend to hold them. Is it 20 years? Is it literally for life to hand them down to your heirs?

One other thing, and this is crucial: You have to be able to take your emotions out of the decisions you make.

If you meet those requirements — a well-balanced portfolio of “forever stocks” with a clear plan in mind and zero emotion — then a buy-and-hold approach could make sense.

Next week, I’ll tell you more about forever stocks and why I love them.