Buy and Hold is Dead.  So reads the headline across blogs, discussion boards, and print media.  Before you send your condolences, let’s take a closer look at the rationalization driving the obituary and whether or not it warrants acceptance.

First, we have to remember that Buy and Hold means different things to different people.  For some, it means buying a stock you like and never selling it.  For others it means buy and homework (a Cramerism) meaning buy a stock you like and hold it until the reasons you liked it have changed.  Still others concede that since they can’t beat the market, they’ll buy low cost index funds to match the market for as long as they hold them.

With market indexes hovering around 10 year lows, I suspect that many people who say that Buy and Hold is dead mean that this last definition of Buy and Hold is dead.  Of course, using that definition, Buy and Hold can never be dead because even with the terrible performance of late, index investors still achieved their goal of matching the market.  Even so, let’s look a little more closely.

The truth is that Buy and Hold works well in many markets, but struggles when markets fall.  My question to those who use this fact to proclaim the death of Buy and Hold is what alternative strategy do you propose?  Many people turn to Buy and Hold because they try and fail to beat the market.  In the twenty year period from 1987-2007 annual returns from average investors were about 7.3% worse than the S&P 500.  Who wouldn’t want to match the market when the alternative is to consistently be handily beaten by it?

Perhaps it’s naive to lump all strategies into two categories, Buy and Hold and Market Timing, but to me that characterization seems valid.  I’m not saying that no one can time the market and achieve index beating returns, but I strongly believe that the average investor cannot find regular success with this method.  The main problem is that it takes two correct decisions, when to buy and when to sell, to maximize returns and average investors have enough trouble making one correct decision.  If either of the two decisions is incorrect, Market Timers stand to lose.

In down markets, investors are constantly second guessing their methods and wondering if an alternative would have worked better.  With so many Buy and Hold investors out there (if only in their retirement plans) it seems natural that there would be such an outcry for the dethroning of the method.  Doing so is short sighted.  Anecdotally, reversion to the mean forecasts that a bad decade is more likely to be followed by a good one.  That notion is backed up by hard data.  Of the ten recessions since World War II, the average return in the year following the bottom was an amazing 32%.  The average investor simply isn’t smart/lucky/skilled enough to get back in at the right point. I know I’ll always get some money in at the bottom by making regular, emotionless investments.  Yes, this also means I’ll get some money in at local tops as well, but since the general market trend over very long terms is upward sloping, the good outweighs the bad.

It’s difficult to argue against short term strategies when long term ones have had a rough patch.  That’s because many more examples of why I’m wrong can be given than why I’m right.  People can show how their idea was better than mine last month and then come back next month with more proof that they were “right.”  Telling them to come back in 50 years for a comparison doesn’t seem to hold much weight.

Those who feel like they have to do something, given the recent events, probably don’t have the commitment that success in Buy and Hold has always taken. It’s easy to be a Buy and Holder when times are good, but it’s when times are bad that true believers are identified.

Those claiming Buy and Hold as dead simply failed the commitment test.  Perhaps they’re investing money they can’t afford to lose.  I’m not.  Maybe they can’t handle being down 50% and should have stayed the hell out of the market regardless of strategy.  I can.  Perhaps they dismiss asset allocation as a performance hindrance.  I don’t.  Maybe they’ve been forgetting to shift to more conservative positions as they get closer to needing invested money.  I haven’t.  Or maybe they’re just impatient.  I’m not.

As a contrarian, I love to hear people say that Buy and Hold is dead.  That increases my conviction in the method for long term success and inspires me to devote even more resources towards its implementation.  Buy and Hold may be dead to some, but I know that it’s alive and well.  And so I’ll say goodbye to the Buy and Hold skeptics.  Go off and try to prove me wrong.  I sincerely hope you find success. But if you don’t, I’ll be here in 5,10,20,50 years (or more) waiting for the day when you return, re-embracing Buy and Hold as the next big thing.