The virtues of buying and holding

Two of America’s eminent investment researchers were recently asked whether the hyperactive markets of the last few years indicate that the concept of buy-and-hold investing is outdated. Their answer? Absolutely not, reports the Journal of Indexes in its May-June issue. “Obviously, it would be much better if we knew when the market was going to go down 40 percent, and we could sell out at the top and buy at the bottom,” said Princeton Economics Professor Burton Malkiel. “But nobody can do that.”

In real life, amateur and professional investors alike seem to chase trends, rather than make smart moves in anticipation of market swings, he said. “More money went into equity mutual funds in the first quarter of 2000, at the height of the bubble, than ever before,” he noted. Then, at the end of that bad market, during the third quarter of 2002, “more money went out than ever before.” Those who were trying to time the market were instead buying high and selling low. Malkiel said that pension funds, which are managed by the smart professionals, tend to carry more cash when markets are a bargain and less cash when markets are expensive. That is exactly the opposite of what a successful market timer should do. Short-term performance should not be an incentive to invest, he said. “My own work suggests that there is very little persistence in performance, and today’s hot funds are more likely than not to be tomorrow’s turkeys,” he said.

William Bernstein, author of “The Four Pillars of Investing” and “The Investor’s Manifesto,’ said investors don’t often understand the concept of buy-and-hold. “What they forget is that the name of the game is not buy-and-hold—it’s buy, hold and rebalance,” he said. Investors who set an investment allocation, and then stick to it by selling asset classes that have appreciated and buying those that have declined, have done very well over the past 20 years. Such a strategy would have forced an investor to sell some stocks at the heights of the markets in the late 1990s and in 2007, and to buy some when they were at their low points in 2002 and early 2009. “That has been a fairly successful strategy,” Bernstein said.