The problem for Buy and Hold strategy in the long term

I have already said that probably the best investing strategy is to have a buy and hold strategy for the long term.

This type of strategy has advantages over the great majority of short term trading systems, in which we know brokers and market makers make good business; not to mention day trading.

Buy and Hold problems

Buy and hold have worked out quite well for the long term most of the time and for most countries in the world.

However, I already tried to explain the cases where this strategy would not work if we assume a “static” approach.

I mean, buy and hold is not a good strategy when we have to invest all our savings at once, since the probability of choosing a bad year is significant.

Another point of view is when we take a more “dynamic” approach, something we can call: buy and hold our pension plan. In this way, we should invest our yearly saving in the same stock indexes year after year. So we invest in a bad year, but also in a good year (when the stock market has already fallen 70%).

Obviously, for those who have the capital and want to invest it in the most efficient way, the “buy and hold pension plan” may not be a good idea. In those cases, a more active approach should be considered.

Buy and Hold bear market

Also, important is the fact that with a “buy and hold” strategy we will face tremendous dramatic moments (bear markets) which certainly is not good for our health. In those cases, it is better to be in cash.

The problem is that those who talk of the buy and hold as the best investing method do so because they have read American investing books. That means; those books refer to the American market.

The last 200 years have been quite good for that market, and buy and hold has worked well when looked at the long term perspective. Although, we have to remember that for a “static” approach buying in 1929 was a complete disaster.

Buy and Hold international?

Well, the fact that the United States have had an almost interrupted bull market for 200 years does not mean that the rest of the countries meet the requirements for a good buy and hold strategy. Not even when we consider a pension plan approach.

You only need to have a look to the European markets the last 15 years to notice that a great deal of “rich” Europe countries have their stock markets quoting well below their 2000 tops. But, best of all is the fact that the secular bear market probably has a lot to say.

How long would it take to an investor in the Italian MIB to recover his money invested in 2000? What about Greece and Cyprus?

Buy and Hold problem

We do not need to go to such dramatic cases.

In France, Portugal and Italy the main indexes are quoting between 40 and 70% of their 2000 tops. And all this despite the tremendous bull market in America last years. I think that an investor who bought in 2000 will take many more years to recover that money.

 

CAC40 2014

mib 2014

PSI portugal
Buy and Hold is not always a good idea

 

There were a lot of cases when the markets took an eternity to recover their previous top.

Perhaps the worst case is that of Austria, which had a 96% fall in the First World War and did not recover that till 96 years later. Only the Soviet cases could compare to that.

There are more interesting cases like the Spanish of 1974 where 22 years were needed to recover the top, and the Japanese of 1989, where we are still and waiting after 26 years.

We cannot really say that buy and hold always works.

It may a very good strategy for most countries, most of the time, but not all countries and not all the time.

Charts Corutesy of Prorealtime

 

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