Is Buy and Hold that Difficult?

[George$]

Mark Hulbert's article in today's New York Times prompts this new thread.
Buy and Hold? Sure, but Don't Forget the 'Hold'

In part ...

ASSUMING that the future is like the past, you can outperform more than 80 percent of your fellow investors over the next several decades by investing in an index fund — and doing nothing else.

That's the clear implication of a continuing study of investment newsletter performance conducted for the last 26 years by The Hulbert Financial Digest. Returns of model portfolios constructed according to investment newsletters' advice show that fewer than one in seven newsletters was able to beat the Standard & Poor's 500-stock index over the long term.

....

It would be easy to call these results devastating to the investment advisory industry. If so few professional money managers can beat the market, why not just put all your money into an index fund and leave it there?

Unfortunately, it's not all that easy to invest your money and then walk away from it.

Buying and holding over the long term requires a discipline that few investors have. And if the strategy is pursued only episodically, buying and holding can produce returns that, in practice, are worse than those of advisers whose track records are theoretically inferior to the market's.

This psychological dimension is crucial in interpreting long-term performance. In the usual pattern, buying and holding an index fund becomes a widely popular strategy during long bull markets At such times, many investors find it much better — and more predictable — than trying to determine either the market's short-term gyrations or which individual stocks will outperform others. By the bottom of the subsequent bear market, however, most of those converts to buy-and-hold index fund investing will have thrown in the towel, unable to tolerate the pain of pursuing it over the long term.

As a result of this popularity cycle, buying and holding, in many investors' hands, translates into buying high and selling low. That results in mediocre returns at best and, maybe, some sizable losses. It's possible that such investors could have made more money with an adviser whose track record was inferior to an index fund's, provided that they stuck with that adviser through thick and thin.

THE lesson to draw from all of this starts with a basic idea: know thyself. Are you the kind of investor who just can't adhere to a long-term buy-and-hold strategy through a long bear market? While there is no shame in acknowledging as much, it is far better to do so now than it would be during the next bear market.

I guess I have always been a "buy and hold" type, perhaps to a fault. To a fault because with hindsight in many cases I might have sold at some point.

But then again my overall long term record is pretty good so I must be doing something right.

[George$]

In poking around I now see that this Hulbert link was already referenced on another thread.
In addition my earlier search of "buy and hold" here failed to find this slight variation that Shakes initiated in March 2006, Buy-and-Hold vs. Managed Index/ETF

However my question is bit different, namely - "Why is buy and Hold so Difficult". To do nothing takes minimum initiative.

[ghariton]

I suspect that "hold" is relatively easy for people who don't care about financial planning, portfolio tracking, etc. But those tend to be the people who don't "buy" in the first place.

For those who are involved, there is a strong tendency to find patterns even where there are none. Accepting the level of randomness that actually affects our investments seems to go against human psychology. Hence the large numbers who believe in, among other things, technical analysis, or "value investing" or "growth investing", or various stock screens.

Finally, just like in Lake Woebegone, where all children are above average, so most investors believe that they have superior skills. "Hey, I know better than the great unwashed." We may not say it, but we believe it. That is why we have so many contrarians, including on this forum.

Did I mention commission-based financial advice, and its built-in bias toward frequent trades? Full-service brokers should come with a warning label.

Georges

[AltaRed]

However my question is bit different, namely - "Why is buy and Hold so Difficult". To do nothing takes minimum initiative.

I believe it is human nature to be protective of things one owns, from the days of the caveman protecting his food and weapons, to today's equivalent of "protection of assets". I am not sure it is all that different from taking some action to protect against burglary in one's home. "Doing nothing" implies being inept or incompetent, i.e. "how could you just stand by and let this happen"?

[ghariton]

I believe it is human nature to be protective of things one owns, from the days of the caveman protecting his food and weapons, to today's equivalent of "protection of assets". I am not sure it is all that different from taking some action to protect against burglary in one's home. "Doing nothing" implies being inept or incompetent, i.e. "how could you just stand by and let this happen"?

If true, wouldn't everyone be into RRBs (like me)?

Perhaps it is the flip side. People hear of some people making a fortune (or anyway doing pretty well) with their investments, and feel left behind. They are determined to get in on the next opportunity, which usually just happens to be the next hot thing.

I still remember the penny mine promoters and their pitch. They would always start off by telling you of the hot mine they had just brought to market and how well it was doing. Unfortunately it was sold out. But they had another one coming along that would do just as well, if not better.

One of the nice things about this forum is how few boasts there are about how well individuals have done.

Georges

[patriot1]

If you don't believe the index will go up in the long run there is no point in buying the index in the first place. I don't think I can outsmart the market and I have no idea whether the index will go up or down over the next day/week/month/year.

I do rebalance, which does involve buying or selling.

[AltaRed]

If true, wouldn't everyone be into RRBs (like me)?

Perhaps it is the flip side. People hear of some people making a fortune (or anyway doing pretty well) with their investments, and feel left behind. They are determined to get in on the next opportunity, which usually just happens to be the next hot thing.

I agree with the concept of 'competing' to be in the game in the first place, but I was responding to only the 'hold' part of the question. Buying is the easy part. Man isn't exactly rational.

[NormR]

I suspect that "hold" is relatively easy for people who don't care about financial planning, portfolio tracking, etc. But those tend to be the people who don't "buy" in the first place.

For those who are involved, there is a strong tendency to find patterns even where there are none. Accepting the level of randomness that actually affects our investments seems to go against human psychology. Hence the large numbers who believe in, among other things, technical analysis, or "value investing" or "growth investing", or various stock screens.

Finally, just like in Lake Woebegone, where all children are above average, so most investors believe that they have superior skills. "Hey, I know better than the great unwashed." We may not say it, but we believe it. That is why we have so many contrarians, including on this forum.

Did I mention commission-based financial advice, and its built-in bias toward frequent trades? Full-service brokers should come with a warning label.

Georges

Now now Georges, the use of one's intelligence when selecting securities has little to do with the ability to buy and hold.

If you want to paint with overly broad brush strokes then ETFers have a very hard time buying and holding. For instance, the SPY index changes hands every 1.5 months or so.

Also, it may be more difficult for some to hold an index fund, or ETF, because the news media is constantly reminding everyone of just how well, or how poorly, the index has done.

[NormR]

If true, wouldn't everyone be into RRBs (like me)?

Which is of course impossible, there aren't than many RRBs available and prices would quickly get out of whack.

[boib22]

If true, wouldn't everyone be into RRBs (like me)?

Perhaps it is the flip side. People hear of some people making a fortune (or anyway doing pretty well) with their investments, and feel left behind. They are determined to get in on the next opportunity, which usually just happens to be the next hot thing.

.

Georges

When the majority finds something that works, and jumps in, it inevitably stops working.

[DanH]

Did I mention commission-based financial advice, and its built-in bias toward frequent trades? Full-service brokers should come with a warning label.

Well, today is a day that ends in the letter 'y', so it's about par for the course for the 'anti-commisson' post to appear.

[kcowan]

I think we spend our whole working lives taking action and fixing things. (Hopefully even some broken ones.) Today we have live feeds that tell us when things are going south hourly. And we have to repeat "Buy and Hold" like a mantra.

Plus as was mentioned, there are others who don't believe in B&H who will be vocal when things are going well for them.

Overall I think it's healthy to be constantly exposed to differing opinions and experiences.

[Bylo Selhi]

If you want to paint with overly broad brush strokes then ETFers have a very hard time buying and holding. For instance, the SPY index changes hands every 1.5 months or so.

Have you checked the width of your brush lately? Perhaps a substantial percentage of those who own SPY are in fact holding it "forever" while that 8x average annual churn rate comes from a relatively small number of [s]day[/s]second traders and market timers.

On a related subject, I just had lunch with my mom. She owns only GICs and a handful of SLF from when Mutual/Clarica demutualized. She'd been reading in the paper about how badly investors had been burned recently and wondered how I was doing. She couldn't believe that our portfolio (~50:50 fixed/equity) was down only ~2% from the peak in May and, more importantly, that it didn't bother me one bit. "How can you say that when Sun Life dropped from $50 to $44?" She looked at me somewhat askance when I replied that actually it had gotten as low as $43 last week and my only regret was that I hadn't bought some at that price. So how much of the current angst that some people are experiencing is due to a media that needs something negative to say rather than the actual gyrations of their portfolios?

[boib22]

The object of any strategy is to make a profit. When you buy and hold you’re just a trader with a longer time frame. If you’re going to make a profit, you have to sell sometime.

Knowing that, it’s hard to watch a profit turn into a loss.

You have to remember that the markets long-term trend is up but the stocks that make up the market are constantly changing.

My favorite, NT,(I was in it for the long term, I bought it for the dividend years ago) certainly made me rethink a buy and hold strategy. Being retired I can’t risk that strategy. I’m now buy and watch.

[NormR]

If you want to paint with overly broad brush strokes then ETFers have a very hard time buying and holding. For instance, the SPY index changes hands every 1.5 months or so.

Have you checked the width of your brush lately? Perhaps a substantial percentage of those who own SPY are in fact holding it "forever" while that 8x average annual churn rate comes from a relatively small number of [s]day[/s]second traders and market timers.

But ya'all seem to be so keen on averages when it comes to comparing returns from funds to the index.

Could be, but the dollar volume seems to indicate otherwise. The more likely explanation is that there are a great many timers and relatively few buy and holders.

[AltaRed]

Could be, but the dollar volume seems to indicate otherwise. The more likely explanation is that there are a great many timers and relatively few buy and holders.

FWIW, I bought a bunch of SPY in Dec 01. My primary regret is that I didn't have cash available to buy in Sept 01 when S&P500 fell below 1000. Not that I've yet made any money on this "buy and hold" investment with the appreciation of the loonie. Course I can always say the dividends have mitigated this to some degree

[NormR]

Did I mention commission-based financial advice, and its built-in bias toward frequent trades? Full-service brokers should come with a warning label.

Well, today is a day that ends in the letter 'y', so it's about par for the course for the 'anti-commisson' post to appear.

Not to worry, a few regulars actually suggested that novices should use advisors the other day

[Bylo Selhi]

You have to remember that the markets long-term trend is up but the stocks that make up the market are constantly changing.

The beauty of indexing is that the behaviour of an individual stock doesn't have much effect over the long term.

My favorite, NT,(I was in it for the long term, I bought it for the dividend years ago) certainly made me rethink a buy and hold strategy. Being retired I can’t risk that strategy. I’m now buy and watch.

Case in point. Much has been said about how badly the TSX got mauled by NT. That may have been true in the short term, but over longer periods it turns out not to have mattered. It's dangerous to reach a broad conclusion (that B&H doesn't work) from a single incident (NT's one-time dominance of the TSX.)

From GlobeFund:

Code: Select all

Returns as of May 31, 2006
Fund    Group Avg    Index*
1 month    -3.93%    -3.86%    -3.56%
3 month    0.11%    0.53%    1.09%
6 month    8.36%    8.66%    9.69%
1 year    24.31%    21.83%    24.65%
3 year    21.17%    19.99%    21.84%
5 year    9.07%    8.04%    9.54%
10 year    n/a    9.11%    10.25%
15 year    n/a    9.30%    10.55%
20 year    n/a    8.76%    9.43%
Since Inception    9.63%    n/a    n/a
3 year risk    10.24    11.00    10.09
3 year beta    1.01    1.01    1.00
* Index refers to S&P/TSX Total Return

Note that whether you go back 5 years to 2001 (a few months after peak of the tech bubble) or 10 years (to the start of the bubble) or further, XIU and the TSX index have consistently outperformed the average Canadian Equity (Pure) managed fund. Yes, that wasn't the case in 2002 and 2003, and those who bailed out then suffered badly, but it turns out that those who "hung in" did OK. And those who owned more than just the TSX, i.e. a balanced portfolio, weathered the NT (et al) storm even better.

[boib22]

Case in point. Much has been said about how badly the TSX got mauled by NT. That may have been true in the short term, but over longer periods it turns out not to have mattered. It's dangerous to reach a broad conclusion (that B&H doesn't work) from a single incident (NT's one-time dominance of the TSX.)

From GlobeFund:

Code: Select all

Returns as of May 31, 2006
Fund    Group Avg    Index*
1 month    -3.93%    -3.86%    -3.56%
3 month    0.11%    0.53%    1.09%
6 month    8.36%    8.66%    9.69%
1 year    24.31%    21.83%    24.65%
3 year    21.17%    19.99%    21.84%
5 year    9.07%    8.04%    9.54%
10 year    n/a    9.11%    10.25%
15 year    n/a    9.30%    10.55%
20 year    n/a    8.76%    9.43%
Since Inception    9.63%    n/a    n/a
3 year risk    10.24    11.00    10.09
3 year beta    1.01    1.01    1.00
* Index refers to S&P/TSX Total Return

Note that whether you go back 5 years to 2001 (a few months after peak of the tech bubble) or 10 years (to the start of the bubble) or further, XIU and the TSX index have consistently outperformed the average Canadian Equity (Pure) managed fund. Yes, that wasn't the case in 2002 and 2003, and those who bailed out then suffered badly, but it turns out that those who "hung in" did OK. And those who owned more than just the TSX, i.e. a balanced portfolio, weathered the NT (et al) storm even better.

Point taken;

[pitz]

Marking my portfolio to market, but *also* marking my tax liabilities to market to get a 'bottom line' calculation of net worth, has done wonders in reducing my overall (perceived) portfolio volatility.

If I had bought NT at $100, the most I could possibly lose (40% tax bracket) is $80/share. Its a simple psychological trick that helps to reduce portfolio volatility, and actually represents a more realistic calculation of portfolio value. After all, taxes are owing at some point or another, an inescapable fact. May as well recognize them properly on one's personal 'balance sheet', even though taxes do not become a 'cash' expense until you liquidate securities.

[brucecohen]

Buy-and-hold is extremely difficult. The ordinary investor's biggest enemy is the cycle of greed and fear. Just ask LaP.

[ghariton]

I was responding to only the 'hold' part of the question. Buying is the easy part. Man isn't exactly rational.

Yes. But knowing why you bought helps a lot when things are going badly. I suspect it is investors who know why they bought who wind up holding. Those who bought on a fad, or because their advisor told them to, are the ones who panic and sell.

While on the subject of financial advisers, NormR and DanH should note that I only criticized commission-based advisors. The ones who charge on an hourly basis, or on any other basis that does not give them an incentive to churn a client's portfolio, are fine by me.

And I should point out that I haven't criticized these people here before. But experience over the last few months with a full-service broker leaves me deeply disdillusioned. I've never seen such churn in an account as there had been in my mother's. If I were more public-spirited, I would go to Jonathan Chevreau or some other journalist. As things stand, I settled and got a whole bunch of trades reversed.

To NormR's point that by buying and holding the S&P, one churns one's portfolio a lot, yes in a technical sense. But so what? Unless you think that the people who add stocks to the index are biased in some way, their churn won't hurt me. But churn based on a full-service broker's advice will almost certainly hurt -- quite a lot.

Georges

[DanH]

GeorgeH,

Before I continue, you should know that this is not meant as an attack on you but a more general rant that I've begun (for some reason) in response to your earlier post warning of commission-based advice.

While on the subject of financial advisers, NormR and DanH should note that I only criticized commission-based advisors.

You may have had bad experiences but you are smart enough to know about the dangers of generalizations where it concerns humans. I started my post-degree working life as a "financial advisor", receiving commissions from selling mutual funds. But believe it or not, during the time I was so licensed, I somehow avoided turning into a money-hungry churn-happy piece of sludge. Go figure.

And I should point out that I haven't criticized these people here before.

So, does that mean it's okay to generalize if it's your first time? Chances are the broker you've dealt with is in the wrong if there was excessive trading (especially if even one trade was not authorized). But that does not make a bad lot out of the whole universe. It's not even proof that more than 50% are worth avoiding. It actually proves nothing other than the fact that your particular broker should be avoided like the plague.

The folks here often speak of biases in sampling techniques. Then those of us that are advisors get told that anecdotal evidence is not statistically significant even though it's backed up by years of practical experience with real life warm-blooded humans.

But then, magically, when the topic turns to dishonest commission-based advisors, those statistical laws vanish into thin air at the hands of those who claim their experiences with dirty advisors provide solid evidence. Earlier, you wrote...

Did I mention commission-based financial advice, and its built-in bias toward frequent trades? Full-service brokers should come with a warning label.

But this isn't even accurate. It depends on the broker's choice of business model. If they've chosen fee-based platforms, there's nothing for them to churn. If it's the old stock-jock type, there's a built-in incentive but there are also good, honest brokers working under this model.

GeorgeH's signature actually sums up the point nicely. But its application is not discretionary.

[NormR]

... but a more general rant that I've begun (for some reason) in response to your earlier post warning of commission-based advice.

Don't let it get to you. By my count 3 out of 4 FWF managers approve of advisors. But I'm not sure about Bylo

[NormR]

I was responding to only the 'hold' part of the question. Buying is the easy part. Man isn't exactly rational.

To NormR's point that by buying and holding the S&P, one churns one's portfolio a lot, yes in a technical sense. But so what? Unless you think that the people who add stocks to the index are biased in some way, their churn won't hurt me. But churn based on a full-service broker's advice will almost certainly hurt -- quite a lot.

Don't get me wrong, ETFs can be great for those who do buy and hold. I'm just doubtful that the buy and hold community is particularly large. But then again, it's easy to be distracted by the wailing (or shouts of joy) from the more active types.