Buy and Hold Revisited

MarketWatch featured “Buy and hold gets old,” as the aimless meandering of the markets is maddening for many investors along with the ever present memories of the 2008 crash:

Yet while both Stadion and Kenjol’s strategies sidestepped the worst of 2008, they also missed much of the recovery the following year.

Kenjol’s Sector Rotation was up 24.3% in 2009 compared to a 26.5% gain for the S&P; 500, while the Stadion fund gained only 2.7%. Kenjol didn’t provide returns for this year so far, but Stadion’s fund was up 2.5% as of July 15, three percentage points better than the S&P; 500.

Wayne Copelin, founder of Copelin Financial in Sugar Land, Texas, said two bear markets in the past decade have convinced him that buy-and-hold can’t work in today’s markets.

“We’ve heard for years from money managers the pitch that ‘it’s not about timing but time in the market’ — but then you notice that the ones pitching this are the ones that make money if you stay fully invested,” he said.

But Stadion’s Thompson still sees a place for buy-and-hold, though with caveats. “If you have the stomach for the volatility, and a long enough time horizon, then no, it isn’t dead,” he said.

Copelin said the securities he owns have a stop-loss order that will automatically sell if they fall by 10%.

[Emphasis added]

I just want to hone in on the highlighted sentence above since that always seems to be the #1 argument by the buy and hold folks against ever moving to cash on the sidelines.

Let’s look at the chart of the S&P; 500:

[Double click chart to enlarge]

The upper red arrow represents the point in time of my last sell signal on 6/23/08. The low was made in March 09 (bottom of right arrow) and a rebound rally pulled the S&P; 500 out of the basement. By all measures, the market recovery was substantial.

However, it was not (yet) substantial enough to make up the losses that were caused by the 2008 crash. In fact, as of last Friday, the S&P; still needs to gain another 23.77% just to get to the level of our sell point in 2008.

This makes the argument “if you sell, you will miss most of the subsequent recovery” look downright silly, which it is. It supports my long-held contrary view that if you don’t participate in a major bear market to begin with, you don’t need to worry about missing a rally; you will still be ahead while everyone else scrambles to make up losses.

Since markets go down a lot faster than they go up, making up losses will not only take years of quality investing, but will also need some cooperation by the overall trend remaining positive.

Given the weakening economy and stimulus induced recovery of the past, which seems to be now dying a slow death, it becomes clear that further upside potential maybe be limited thereby further extending the time needed to get to a breakeven point.

While the article points out that ‘buy and hold gets old,’ to me, it’s been dead for a long time.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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