Yesterday, my buddy Paul showed this Vanguard interactive chart.

Vanguard was trying to show the superiority of Buy & Hold versus “emotional investing.”  I have many issues with their argument.

First, I have to challenge the use of that term — emotional investing — to describe what is a fixed mathematical exit and entry strategy. In fact, that is the exact OPPOSITE of emotional investing: Using predetermined risk management system that operates without any human intervention — a quant black box — is not emotional investing.

Paul used the default settings — something guaranteed to never beat the market. That approach makes Buy & Hold look like the superior strategy. Vanguard shows B&H performance of $63,791 versus in/out performance of $33,628:

Oh, Mr. Bogle, please tell me more about Buy & Hold!

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Vanguard did not count on clever market participants engaging in na little clever slide play . . . just a tweak here, down 20% to get you out, up 23% to get you back in — voila! Massive out performance form-fitted to recent history:  B&H performance of $63,791 versus risk managed performance of $88,095:

Risk Management vs Buy & Hold

And, you have not only out-performed over the past decade, you are actually up since 10 years ago — versus still negative for Vanguard.

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Thanks Paul,  Bruce, Scott F.

Category: Mathematics, Quantitative, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Vanguard’s Broken Discipline: The Buy & Hold Model”

  1. dead hobo says:

    Don’t forget about buying for the long run. If you take the past 350 years of stock market activity into consideration and look at the long term average gain, you will always make money if you hold long enough – in fact you can expect a tidy profit, yessiree. The facts and history make this claim irrefutable. You never need to sell. Just re-balance. Keep it all in. Always. People much smarter than you run Wall Street. They use higher math and the Bodine quants are genius. If you ask nice, they might let you in. Hurry before you lose out. The market’s going up as you read this.

  2. [...] A couple of approaches to improve on buy-and-hold returns.  (MarketSci Blog, Big Picture) [...]

  3. scharfy says:

    I kind of like this Bogle guy, despite the fact obviously the lack of real growth of the last 20 years puts a little chink in his buy n hold ideology. Seems like a decent man.

    a commencement speech he gave in 2007…

    John C Bogle – Enough

  4. peterbod says:

    20% to get you out, 23% to get you back in – voila! Massive outperformance.
    Most other combinations – underperformance.

    Is this the case for active management?
    Is this the magic formula – 20% and 23% ?

    Can you, Mr Ritholtz, share with us your fixed mathematical exit and entry strategy so that we can outperform the market like you? By how much have you been able to outperform the market in the last 5 and 10 years using your predetermined risk management system?

    ~~~

    BR: This is form fitted data, gamed to take advantage of the parameters Vanguard set up.

    Its backwards looking, not forwards — another words, you outperform if we get a repeat fo what just happened.

    My point is the Vanguard chart (and defaults) are nonsense . . .

  5. whitelion says:

    Forget the big bull run of the 90′s how about managing the market this past decade where the market essentially went no where.

    Use inputs of pull out of market when down 12% and re-enter up 22%. Base these inputs starting with 1999.

    One would be up about 60% for the decade vs flat staying invested.

  6. emmanuel117 says:

    @peterbod

    “Can you, Mr Ritholtz, share with us your fixed mathematical exit and entry strategy
    so that we can outperform the market like you?”

    https://www.fusioniqrank.com/products.php

  7. bondjel says:

    Barry,
    Sure Vanguard has massaged the numbers to make buy and hold look good and a flaky market timing approach look bad, no question about that. However, Buffett is a buy and hold investor and apparently has perhaps the greatest investment returns record in world history. Double the S&P over the last 45 years and even better than that for his private partnership between 1958 and 1969.

  8. peterbod says:

    @emmanuel117

    clicked on the link
    https://www.fusioniqrank.com/products.php …. and got nothing but a
    solicitation to pay $50 a month for information that in all probability
    is useless.

    How come my second question — “By how much have you (Mr Ritholtz) been able to
    outperform the market in the last 5 and 10 years
    using your predetermined risk management system?”,
    was ignored?

  9. Mr.E. says:

    20% out and 25% back in is even better !

    10 yr = 13,721
    20 yr = 73,100
    22 yr = 104,812

    The issue is this assumes a fixed entry point then hold until an exit signal is given, then return.

  10. leftback says:

    SELL Chuck Prince dancing. Blackstone IPO. Multi-million dollar birthday parties.
    BUY Jim Cramer public flogging on The Daily Show, daily appearances of Bob Prechter and Marc Faber on CNBC.

    Mr. Ritholtz has been a master of the Sentiment Extremes. Social mood indicators are more valuable than P/E ratios, Bollinger bands and momentum measures.

  11. patient renter says:

    I have to challenge the use of that term — emotional investing — to describe what is a fixed mathematical exit and entry strategy.

    I’m not sure that they are using that term to describe mathematical trading. I think they’re indeed referring to trading on emotion, which doesn’t apply to you. Compared to behind-the-curve-emotional-trading, buy and hold isn’t so terrible, but it only works if the market goes up in the long term, which itself could be quite an assumption.

  12. jjay says:

    If you use the Dow to track performance, how do you allow for the times they throw out the loser stocks, put in a winner and recalculate the average? How many stocks have come and gone from the Dow since 1920? If you are using real money and actually buying stocks, you are stuck with the losers when they recalculate the Dow and add a new, more promissing stock. I often wondered about that.

    ~~~

    BR: It doesn’t matter if you own the index — but versus owning stock, this is called survivorship bias — the index survives, but individual names die.

  13. emmanuel117 says:

    @peterbod

    How come my second question — “By how much have you (Mr Ritholtz) been able to
    outperform the market in the last 5 and 10 years
    using your predetermined risk management system?”,
    was ignored?

    I gave you a direction to find the answers to your questions. Maybe you should stop expecting people to spoonfeed you.

  14. winstonw says:

    Thanks Vanguard, now that I know b&h is superior, I don’t need your services.

  15. Simon says:

    Is it worth noting that the positive divergence only occurs after 2000?

  16. Sunny129 says:

    The outsize performance of S&P during 18 years (1982-2000) was unusual and aberrant when compared to any of the previous rolling 18 yrs of 20th and 19th centuries! The inclusion of this period will unduly influence any kind of ‘formula’ especially on a back testing model.

    Also be mindfu, that ‘wealth’ created in the 30-35 years was significantly influenced by debt and excess leverage. There was revolution in telecommunication(inter net) and transportation with significant effects on the Economics. Most of the ‘credit’ created(out of thin air by banks) by Securitizations based on loans of various kind of assets (housing, auto, HEL, CC and student loans++), was only after 1999! Synergic effects secondary to confluence of above said factors is unlikely to be repeated or can be recreated!

    Any kind of formula, equation or mathematical will be outdated the moment after it’s creation. Why? B/c of one factor called CHANGE. This variable input cannot be duplicated 100% in advance.

    There is a famous saying: you can never step into the same stream twice! Can you recreate ‘that’ stream again or prevent the’ next one’ not occurring?

    There is no such ‘sure thing’ nor it will be! Rest is mental masturbation!

  17. The Window Washer says:

    Hmmmm….

    How come no option to sell when the market went up and buy when it went down?

    I think I’m onto something.
    I should start a fund.

  18. VennData says:

    Mr. Bogle might say that while some have outperformed, others have not. A “buy and hold” investor would have done average – even a bit better than average due to lower fees.

    And his conclusion? From now on will this model continue to outperform? …to which he would answer that he hasn’t any idea, but why take the chance when you can be slightly above average by “buying and holding” index funds?

  19. I like Bogle’s message of index and keep fees cheap.

    He is a goo guy — BUT — we know B&H is a mugs game.

  20. JimRino says:

    Sunny’s got a point. Securitization and Leverage are Highly Inflationary, yet still unregulated.

  21. cognos says:

    Best market timer ever? — George Soros.

    Classic dual-reflexivity is the best “model” to use to understand the trend/counter-trend and bubble/burst process of markets.

    When EVERYONE believes in “buy-and-hold” (and indexing) it has reached its illogical extreme (1999).

    When NO ONE beleives anymore and the entire equity market is discredited. Time for “buy-and-hold” (1983, 2009?)

    Ergo – the next decade is somewhat likely to be a good one, for the buy-and-hold crowd.

  22. tCA says:

    What about Mebane Faber’s paper and book (the Ivy Portfolios) on using the 200-SMA as your buy/sell signals or other similar strategies? It takes emotion out of the equation if you’re disciplined and patient. It certainly seems to be better alternative to B&H. Then, you use Mr. Bogle’s cheap ETF’s to implement the strategy.

  23. Pat G. says:

    What would you expect? Bogle is old school. That has its advantages too in that he appears principled.

  24. Sunny129 says:

    Buy and Hold worked between 1982 – 2000 b/c it was SECULAR bull market but that strategy became out dated there after!

    Online trading and information age made the field more volatile along with creation two bubbles and third one, forming soon due to zero int.rate along with FED actively encouraging risk taking to recapture and recreate bubble of 2006-’07, which they are failing to this date.

    INSOLVENCY is the core of the problems and CREDIT crisis for which various measures of providing LIQUIDITY is going no where! There is more MISPRICING of the assets, distorting the economic landscape, NOW! They think they are smarter than Japan and also doing ‘opposite to their own ‘advice given SE Asian countries including Indonesia/Malaysia by IMF (Summers+ Geithner?) during 90s. They opted for ‘Kick the can down’ way instead of Seweden way!The amount of Govt interference including bailing out FIRE Economy at the cost of and ignoring General (Mom-Pop) Economy has no parallel past decades to compare!

    Strategy guided investing with tactical allocation of uncorrelated assets was/is the preferred approach from here going forwards, in my view. I look forward to dissenting views.

  25. DerryBrown says:

    Well put Barry, although I don’t think buy and hold is broken, I have proof that it never worked in the first place.

    Mutual funds are the ones that sold people on the concept of Buy and Hold because that is how they can collect the most fees. I think it is scary that those promoting the Buy and Hold approach lead people to believe that an average annual return of 8%+ can be expected over the long term. This is such a half truth it is a lie.

    @bondjel

    “Buffett is a buy and hold investor and apparently has perhaps the greatest investment returns record in world history.”

    Buffet is not a buy and hold investor he is a value investor with a long term perspective, this involves stock picking.

    @dead hobo “You will always make money if you hold long enough – in fact you can expect a tidy profit, yessiree. The facts and history make this claim irrefutable.”

    Market history reveals that success through Buy and Hold occurs only when you are lucky enough to hold during a prolonged period when the market does well. There have been three periods longer than 57 years when the US market has achieved no real growth at all after inflation. How long have you got to wait @dead hobo? Did you realize that the US market has even had one period of 130 years with no real growth?! Buy and Hold is the best option for most people, it is a much better option than not investing at all but for the diligent investor it is still far from the best option.

    Here are the numbers to back up my claims: http://etfhq.com/blog/2010/02/19/buy-and-hold/

    Derry

  26. Bogle, much to his Credit, is more than ‘one-trick’ (B&H)-Pony..

    see:
    farmera1 Says: November 13th, 2009 at 12:53 pm
    Book Recommendation:

    BATTLE FOR THE SOUL OF CAPITALISM by John Bogle (founder of Vanguard)

    A good read. Bogle says we have moved from ownership capitalism to managerial capitalism where companies are managed for the benefit of management not the owners. Can you believe it. He also gives his recommendations on what can be done to fix this cockeyed system.

    Until this changes insiders (boards, upper management etc) will continue to make hundreds of millions (like the CEO of Lehman did) all the while managing the company into the ground. What a system, what a country.
    http://www.ritholtz.com/blog/2009/11/dodd-shareholders-should-nominate-boards-directly/#comment-234340
    to begin with..
    ~~
    though, in the B&H realm, this: tCA Says: March 5th, 2010 at 5:56 pm

    What about Mebane Faber’s paper and book (the Ivy Portfolios) on using the 200-SMA as your buy/sell signals or other similar strategies? It takes emotion out of the equation if you’re disciplined and patient. It certainly seems to be better alternative to B&H. Then, you use Mr. Bogle’s cheap ETF’s to implement the strategy.
    ~
    the 200 dma strategy is as close to auto-pilot, that’ll keep the Plane in the sky, as any ‘Investor’ should want to get..
    ~
    and, back to Bogle, his central Thesis for Indexing had less to do w/ EMH, than the provable Fact that ‘active’ MutFund Mgr.s didn’t earn their keep.

    It was a Fact then, has been a Fact, and is a Fact, now. ‘Actively’ Managed MutFunds, by and large, are costly, in more ways than one..

  27. dead hobo says:

    You remind me of the Wisdomtree ads on TV where the two old guys banter about the value of back testing while trying to look wise and un-cootly. They used the back test phrase so much, it made you think there might be two meanings.

    HA HA “Back testing”. You don’t see that word used much anymore.

  28. seneca says:

    DerryBrown: the seemingly poor showing for buy and hold in the web site you pointed to ignored dividends; it was not an illustration of total return, just stock index return. Dividends (and stock buy backs) have accounted for half of the real total return of stocks over the long haul.

  29. DerryBrown says:

    @Seneca, that is true, the real stock return including dividends but before inflation over the past 200 years is about 6.1% annually. But for the major US companies with defined-benefit plans the projected returns average 9% – a huge connect from reality. Allow for an average inflation rate of 3% and only through luck will you see good returns as a buy and hold investor.

  30. panchog says:

    @BR,

    I am not sure “B&H is dead.”

    I happen to think Vanguard’s no load funds and B&H strategy is perfect for the average joe (or my mom), who doesn’t know jack about investing.

    “You save money, and put it in the market & forget it!” In the long-haul, I don’t think they really care if you can squeeze out 10% more gains or not over time.

    Saying B&H is too simple, is like saying the Giggles’ music lacks lyrical depth.

    Speculators vs. traders vs. investors? For every John Paulson, there’s a Warren Buffett (20% annualized gain in last 40 years).

    Respectfully, PG

  31. ETFreplay.com says:

    No mention of risk-adjusted returns so I will just state that you are much better off thinking in terms of reward vs risk than thinking about ‘buy + hold’ vs ‘other strategies’ — it takes some very healthy return forecasts to make the S&P 500 attractive relative to its volatility on a buy and hold basis — and this has ALWAYS been true. 10 years ago and today. The bottom-line is that equity markets are very volatile relative to the long-term returns. This is statistically irrefutable.

    If you don’t think you can do better than average — then yes, buy indexes — but at least focus on mixing indexes thoughtfully. And this does not mean diff’t EQUITY-only indexes in the United States-only.

  32. Byno says:

    So, Vanguard is massaging the chart because of the entry/exit points, but Paul is not massaging the data by choosing 1989 as the start.

    Because god knows if you followed that strategy in 1987 you wouldn’t have sold at the bottom and missed the ensuing rally. No sir. Nope.

    Tu quoque argumentation: Let you show me it.

  33. farmera1 says:

    IMPORTANT INFORMATION FOR ANY PURCHASER OF MUTUAL FUNDS, there are hidden costs in mutual fund ownership that are a tremendous headwind to profitable ownership, whatever the published expense (expense ratio) are you are paying roughly double that amount when you include hidden costs.

    From the WSJ:

    “Portfolio managers can rack up steep expenses buying and selling securities, but that burden isn’t reflected in a fund’s standard expense ratio.”

    “But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.”

    Hoffer 8:34PM “…Bogle, his central Thesis for Indexing had less to do w/ EMH, than the provable Fact that ‘active’ Mut Fund Mgr.s didn’t earn their keep.”

    My opinion is that most managed mutual funds are the Mugs game to use Barry’s term. Why, you have two strikes against you out of the gate:
    1) Costs both published (management fees) and buried costs (see the WSJ article).
    2) Timing is difficult and only done successfully by the very few.

    “A study updated last year of thousands of U.S.-stock funds put the average trading costs at 1.44% of total assets, with an average of 0.14% in the bottom quintile and 2.96% in the top. Expenses are one of the most important things investors can look at, says study co-author Richard Evans, an assistant professor of finance at the University of Virginia’s Darden School. “We find that our estimates of trading costs” are an important predictor of performance. While “some trading actually adds value,” Mr. Evans says, high trading costs overall tend to have a negative impact on performance. On average, $1 in trading costs decreased net assets by 46 cents in this study.”

    This is a very important point for anyone looking to invest “long term” in any mutual fund, but if you do want to invest long term in a mutual fund, choose one (even though it is nearly impossible to find the hidden fees) that has low management fees at least and no load. Choosing almost all mutual funds will guarantee you poor performance over the long term. Investing long term in almost any mutual fund is the true MUGS game.

  34. ETFreplay says:

    The world has long moved past the tired old active mutual fund/John Bogle debate.

    If the active mutual fund is just something that offers exposure to a risk factor, like ‘large-cap value stocks’ — then you can likely do better buying a large-cap value index (fund or etf) than an active mutual fund.

    BUT, and this is the important point, a fee is definitely warranted to those who can improve the overall portfolio sharpe ratio. (own small cap value, or don’t — own high-yield bonds, or don’t — own emerging asia stocks, or don’t — own International real estate, or don’t — own emerging markets bonds, or don’t). And then how to mix these exposures into a plan that makes given your own personal situation.

    John Bogle won the OLD argument a long time ago — but that is no longer very relevant. Mixing indexes intelligently with opportunistic re-balancing and an occasional well-timed portfolio tilt — John Bogle cannot help you here.

  35. bondjel says:

    Derry Brown says:
    “Buffet is not a buy and hold investor he is a value investor with a long term perspective, this involves stock picking.”

    I guess we need a definition of what precisely constitutes “Buy and Hold”. My definition of Buy and Hold certainly says nothing about it NOT involving stock picking. You seem to be implying that something like merely buying and holding index funds is your definition of buy and hold; to me that’s a peculiar definition. I’d say buy and hold means that when you buy certain carefully selected stocks you intend to hold them for the very long term unless you find you’ve made some serious error. That’s what Buffett does and I’d call that buy and hold.

  36. [...] chart were chosen to ensure Buy and Hold looked fab. But as Ritholtz pointed out in his post, Vanguard’s Broken Discipline: The Buy and Hold Model “clever market participants” making fleet-footed moves in and out of the market could in fact [...]

  37. [...] Big Picture blog – Vanguard’s Broken Discipline: The Buy & Hold Model [Just for kicks, set your start date in 2000, end in 2009, sell when losses equal 10%, then [...]