by James Bianco
Bianco Research
November 18, 2010


The Wall Street Journal – Burton G. Malkiel:  ‘Buy and Hold’ Is Still a Winner

An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century.

“Many obituaries have been written for the investment strategy of buy and hold. Of course, investors would be better off if they could avoid being in the stock market during periods when it declines. But no one—either professional or amateur—has ever been able to time the market consistently. And when they try, the evidence shows that both individual and institutional investors buy at market tops and sell at market bottoms.

Money poured into the stock market at the peak of the Internet bubble during the first quarter of 2000. Stocks and mutual funds were liquidated in unprecedented amounts at market bottoms in 2002 and 2008. Professional investors had large cash holdings at market bottoms but tended to be fully invested during market tops. Buy and hold investors in the U.S. stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative. Market strategists called for a sharp market decline in late August 2010 as technical indicators were uniformly bearish. The market responded with its best September in decades.”


Comment: Malkiel is famous for his 1973 classic “A Random Walk Down Wall Street.”  In it he argued for the “strong” form of the efficient market hypothesis which states no one person can outperform the market, so don’t try.  Just own the indicies for long periods of time and you’ll do as well as any active manager.

Malkiel’s ideas spawned the idea of the index fund, starting with the Vanguard S&P 500 index and eventually the ETF.

In the op-ed above Malkiel is “defending his baby,”  asserting that owning indices for long periods is the best investment one can have.  Active managerment does not work.

However, as we detailed in our November Total Return Review, data on stock and bonds goes back to 1803 (no typo!) and the last 30 years (1980 to 2010) is the only 30-year period where bonds have outperformed stocks.  The charts and table below are from that report.

Malkiel argues that a rebalancing technique will produce superior returns.  What he neglects to mention is bonds have outperformed stocks for a generation and counting.  How did that happen?

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Category: Investing, Really, really bad calls

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.

34 Responses to “Is ‘Buy And Hold’ Still A Viable Investment Strategy?”

  1. wally says:

    “But no one—either professional or amateur—has ever been able to time the market consistently.”

    Maybe not, but I sure as hell got most of my stuff out of equities when it was obvious that the credit bubble was bursting. “Buy and Hold” has to be modified by the addendum: “except when it is patently stupid”.

  2. DeDude says:

    For those with a real job who cannot spend a lot of time on following what happens in the markets, the buy hold and rebalance approach is probably the best they can do. Even attempts at changing your asset allocations drastically “when it is patently stupid” is a risky strategy. All the time there are people making good sounding arguments as to why the market will explode or why we are heading into armageddon – figuring out when one camp or the other is right, takes a lot of time.

  3. steve says:

    Here is the Great Stock market Debate

  4. low-tech cyclist says:

    “bonds have outperformed stocks for a generation and counting. How did that happen?”

    OK, how DID it happen? I’m out of my depth here, and would kinda like to have some framework for understanding what’s been going on.

  5. bear_in_mind says:

    @DeDude: You nailed it. I work in an incredibly complex and challenging career where I just cannot monitor every development in the markets. I love learning about it and picking up tools along the way, but the kind of time it would take to master this casino? No way. So I carved out a sizable chunk of moolah and placed it in a relatively safe, income-producing fund that affords me a bulwark moving forward. All new money is dollar-cost-averaged into seven diverse mutual funds.

  6. ben22 says:

    The year is 100 AD…. the stock market is of the Roman kind…’ve all heard this one before right?

    Why does anyone listen to linear thinkers?

    The markets of today might not look like the markets of tomorrow. Some people have discovered this since 1973.

  7. IS_LM says:

    The strong form of the EMH was disproved by Stiglitz and others back in the day. The semi-strong form has been disproved by the many asset bubbles since the early 1990′s. The weak form, which is consistent Malkiel’s approach, roughly translates to the notion that you can’t beat the market without taking on greater risk. (Richard Thaler calls this the “No Free Lunch” component.) This weak form appears to remain intact, which is why DeDude’s advice is correct for the price-taking individual investor, especially when there are costs associated with rebalancing assets. And we all know that institutional investors, who are not necessarily price takers, do not follow Malkiel’s buy-and-hold strategy.

  8. The only way to win in the casino is if you own the house. Stock markets are not investment vehicles, they are roulette wheels and blackjack tables. You might slip out the door with a few winnings if you’re lucky and you know when to quit, but that’s about it–and don’t forget about the transaction fees everytime you lay down a card.

  9. RandyClayton says:

    > What he neglects to mention is bonds have outperformed stocks for a generation and counting. How did that happen?

    How? We have just been through the Great bond bull market — perhaps of all time. Treasuries went from 15% to about 0%. Does Mr. Bianco believe the bond bull has farther to run? 2 years? 5 years? 10 years?

    I recently went to library and leafed through every page of The Value Line survey. I counted about 150 stocks which have gone sideways for 10 years while earnings and dividends are up 2x to 3x over the decade ago level.

    Such are the consequences of the Great Stock Bull that died in 2000. The next 10 years belong to which asset class?

  10. Sechel says:

    My own experience(over 20 years) is this is possible but I myself only beat the index by low single digits( pre -tax ) I did this buying low beta , best of breed stocks currently not in favor. Most find this strategy boring and that’s the real beauty of it… I avoid the aggravation associated with daily trading.

  11. ewmayer says:

    @IS_LM: “The weak form, which is consistent Malkiel’s approach, roughly translates to the notion that you can’t beat the market without taking on greater risk.”

    …or by rigging the game in your favor. And *that* form of the EMH (with the E being reinterpreted as “Exploited” or some other suitable term) is very intact indeed.

  12. VennData says:

    “…Malkiel argues that a rebalancing technique will produce superior returns. What he neglects to mention is bonds have outperformed stocks for a generation and counting. How did that happen?”

    Don’t know, Don’t care. Don’t “Buy and Hold,” you should “Buy and Rebalance.”

    Pick an asset allocation (e.g. 60% stocks/40% bonds – 70/30, 23/77, whatever,) buy dirt-cheap ETFs to represent your asset allocation, and rebalance when your 60/40 (or whatever) asset allocation changes due to market conditions. That’s it.

    You must REBALANCE your non-changing asset allocation, to show “the market” the same risk profile at all times. …why? Because you don’t know what the market will throw at you next.

    So in spite of the under performance of stocks over recent time periods, a “Buy and Rebalance” plan is guaranteed to out perform the average investor since the average investor IS THE MARKET (but he’s paying fees, trading costs, high-priced research, loads, industry experts etc…) …while you just buy cheap ETFs and wait until you need to re-balance.

    So over this bad, bad time period, you would have received the return that everyone else got – on average (adding back all their wasted fees – think Jack Bogle) – in stocks PLUS those valuable interest payments from bonds, you would have OUT-PERFORMED the average investor after fees and costs… Out-performance, guaranteed, on average …and you will continue to do so as long as you “Buy and Rebalance.”

    P.S. not for the APWC (Amateur Policy Wonk Corps) who “feel” they can pick stocks, outguess the market, and be the next Warren Buffet – year in, year out – for the rest of their lives. (e.g Obama’s a Socialist! I must sell everything!)

    P.P.S What would a re-balancer be doing now? Moving out of bonds. What did they do in March of ’09? Moved into stocks. …why? Because the market changed their allocation, so they cheaply move back to their target allocation.

  13. Joe Friday says:

    “Is ‘Buy And Hold’ Still A Viable Investment Strategy?”

    Died in 2001.


    “Malkiel: ‘Buy and Hold’ Is Still a Winner – An investor who used index funds and stayed the course could have earned satisfactory returns even during the first decade of the 21st century.”


    The DJIA would have to be something like 17,000 just to get back to where it was when President Clinton left office, in inflation-adjusted dollars.

  14. The Internet has changed the stock market, forever. You might as well have B.I. Before Internet, and A.I. After Internet, when discussing the stock market.

    Digital deals and digital delivery initially caused significant stock declines in “hardware” based products over the past few years. However, investor does not live by digital alone, and nobody knows what the happy balance is between being able to digitally exponentialize deals, and actual nuts bolts manufacturing.

  15. Bill W says:

    Buy and hold… your ankles.

  16. maynardGkeynes says:

    It really doesn’t take a lot of courage for Malkiel to publish his Op-Ed at a time when an alleged “market recovery” supports his long held position. Tooting his own horn after an 8 month run up is just another form of selection bias, post hoc. A year ago, it would have been equally easy to make the opposite argument. The truth is that there is simply a tremendous amount of uncertainty now, no matter what one’s long term investing strategy is. I wish these guys would just say that.

  17. Sechel says:

    Burton Malkiel’s question is phrased wrong.

    Its not whether buy and hold makes sense, is whether the market holds value at this time. Yields are low. P.E. relatively high on forward earnings, and the economy weak. That’s the issue. Furthermore, we’re no longer in an era of declining interest rates, so in all probability focusing on the wrong asset class. It may not be stocks over the next ten years but commodities.

  18. bonderman says:

    Swarm the Banks has a great point. Information, pre-Inet was limited, late and without the jousting from others with a differing opinion. Post-Inet, the problem is too many opinions so one has to be very selective. Post-Inet, information is very fresh.

    I do have a question though. Why were the tabular information entries all limited to 2006? That will be four years ago in a month. It was a very interesting period for a buy and hold investor.

  19. Sechel says:

    I disagree. Benjamin’s Graham’s methods did not require fast internet access. The short term be it minutes hours or days is just noise.

  20. pcurve says:

    “But if they had missed the 30 best days in the market over that period, their return would have been negative”

    I’m so tired of hearing this.

    You couldn’t purposely miss all of those 30 best days even if your life depended on it. That requires almost the same amount of skill needed buy stocks a day before those 30 days.

  21. Bill W says:

    First I must appologize for my previous silly comment. It was meant to be a joke.

    I wonder if buy and hold still works if it is followed in emerging markets instead of in the United States. As GDP slows down, wouldn’t it make sense that profit growth will also slow down?

    I found this chart of annual growth. If nothing else, it’s interesting to see what a roller coaster the economy used to be. If you paste the link into your browser it should open for you.

  22. bonderman, thanks.

    Sechel, I did actually give an example of what I was talking about. A few years ago, Wall Street analysts were down on companies that made hardware, and up on companies that made digital software.

    It was almost like a form of inbreeding. The internet created a shift in thinking, that anything hardware was old school, and anything digital, which could easily be copied and recopied, was the investment wave of the future.

    “If only I could up with an “app” for Apple based products, I could become rich overnight….” Aren’t there over a million apps now for Apple products? How many of those Apps makers are going to get rich?

    A further analogy between pre-internet and post-internet can be made using the film vs video argument. Your odds of selling a project shot on film are actually better, assuming you can finish your project, than shooting on digital video. However, shooting on digital video requires less cost and risk so many more digital productions (aka, Apps) are shot nowadays.

    The same can be said with investing in hardware manufacturing companies versus digital delivery companies. Digital products create the lure and fantasy of huge profit margins because every now and then, a digital product does create a huge profit margin. However, at some point, manufacturing has to considered viable as well.

    I think digital has opened up huge communication corridors, and along with that, a door to greed gone wild. Why be happy with a portfolio of home mortgages when a bankster can simply cut them up and rename them every which way they want, and then some, and then again, and then sell them all, over and over.

    Whereas, prior to the internet, things just moved slower and the motivation to do such types of slicing and dicing, even it did happen, happened at a much slower pace and the fraud was more easily balanced out by real projects.

  23. As for Buy and Hold, I don’t think it’s a viable strategy for the next several years because I think the stock market will stay stuck between 9,000 and 13,000 for the next several years, in essence becoming a hamster wheel that just goes round and round.

    One solution for a hamster wheel style of stock market is for stocks to start offering dividends again. Then, people will care less what the stocks value is as long as the stock can produce a steady dividend.

  24. kaleberg says:

    It should be obvious why bonds have outperformed stocks for the last 30 years. Until the 1980s, stocks paid dividends and were evaluated on their ability to pay those dividends. Investors often talked about “coverage”, how well the company’s earnings covered their anticipated dividends. Yes, it was possible for a stock price to rise without a corresponding rise in dividends based on the company’s anticipated growth, but this growth was expected at some point to pay off in higher dividends.

    In the 1960s and 1970s, a group of theorists argued that dividends don’t matter. We get this in financial circles every so often. Dividends don’t matter. Earnings don’t matter. Blah, blah, blah. If you can convince enough people you can make a killing and then it doesn’t matter, at least not to you, whether earnings or dividends matter or not. Investors and corporate management began to believe this, and dividends suddenly didn’t matter. Consider how much easier it is to cook the books when one doesn’t have to actually ever pay dividends. Ivar Kreuger would have retired to Santa Barbara instead of blowing his brains out in Paris.

    Actually having to pay dividends does two things. One, it forces a certain level of financial discipline in that the company has to pay its owners their cut of the profits. The money has to be available as cash – all of it, and on time four times a year. Two, it gets the money out of the hands of the corporate management who would otherwise squander it, usually on their own salaries and bonuses, but also on clueless projects that no sane investor using his or her own money would consider.

    Bonds, unlike stocks since 1980, require companies to make cash payments as interest.

    From an investor’s point of view, the difference is extremely important. Bonds and dividend paying stocks in a climate of dividend competition align management interests with investor interests. Without dividends and dividend competition, corporate ownership has no real meaning.

  25. boogabooga1114 says:

    For the idiot on the street (Main, not Wall), what’s the alternative?

  26. IvoZ says:

    “But no one—either professional or amateur—has ever been able to time the market consistently.”

    That is bullshit – look at systematic Managed Futures managers – timing the market for 20-30 years successfully. For example: Man AHL Diversified Plc has achieved since Mar-1996 16.6% p.a. ROR with a 17.6% volatility p.a. and a 20% max. drawdown. The S&P 500 TR has achieved 5.9% p.a. ROR with a 16.5% volatility and a 51% max. drawdown in the same period.

    The reason trend-following works: momentum is the name of the game within the herd. And it is even relatively stronger nowadays when central banks have rendered fundamental analysis almost useless.

  27. IvoZ says:

    @ Curmudgeon “markest are a casino”

    Unfortunately markets are worse than a casino. At a (“fair”) casino the odds are always the same way distributed and are not skewed, but most importantly they are calculateable and not manipulateable (technically). Casinos are perfect examples for risk. Markets are examples of uncertainty, uncalculable odds and manipulation by government and connected players. I would love if markets were a casino (maybe they are a casino only for the big players, but not for the common folk).

  28. EuroKiwi says:

    “bonds have outperformed stocks for a generation and counting. How did that happen?”

    Is it a symptom of a maturing economy/society? I suspect the demographics prevailing at present with a dramatically aging population are unique in the history of the U.S. .

  29. Sechel says:

    Swarm the Banks,
    Last ten years was a bubble, dividend yields were way below norm. Hussman has a bood piece out today on that..
    Bottom line. The normal typical relationships didn’t hold. Minsky anyone?
    When we analyze historical relationships between economic and financial variables, it’s important to examine the data for “outliers” that significantly depart from typical behavior. Very often, these outliers are corrected over time in a way that creates profit opportunities. In the office, we usually refer to these observations as being “outside the oval,” because they diverge from the cluster that describes the majority of the data.

    Failing to recognize data that is outside the oval can lead investors to learn dangerous lessons that aren’t valid at all. A good example of this is the relationship between valuations and subsequent market returns. The chart below presents the historical relationship between the S&P 500 dividend yield and the actual annual total return achieved by the S&P 500 over the following decade. The majority of the points cluster nicely – higher yields are associated with higher subsequent returns.

  30. JimRino says:

    Tax cuts for the rich, have sapped the country of infrastructure upgrades, rail and highway, water, solar, and replaced that with an inflated market.

    This has had the effect of depressing economic growth, and throwing money away on expensive stock.

  31. gordo365 says:

    Does buy and hold work? Depends on what you buy and hold.

    I bought a bunch of gold coins at $500 and continue to hold. That has worked out well. I bought a used sail boat and continue to hold in a slip I’m renting. That hasn’t worked out so well.

  32. MelJ says:

    Why is ‘buy and hold’ versus ‘market timing’ a debatable question?
    Aren’t all the facts out there to determine the answer? Of
    course the market timers would have to have a public record
    (you don’t Barry, right?). And since there are so many
    market analysts out there some can do better (or worse)
    for many years just by chance, but it seems to me that
    can be taken into account mathematically.

  33. mloren1357 says:

    The idea of buy and hold needs to be upgraded. At times the markets are insane and scary with wild swings, for the nontrader, there may be scary times and it is safer to sit on the sidelines. Sell more equity and sit on more cash. When the markets are a “sure thing” it seems a good time to get scared and build up more cash, gradually. when the blood is in the streets, and no one sees any future in equity, it may be a time to gradually accumulate stocks. I don’t think it makes sense to buy and hold and remain stupid. I think there is more interest now than ever in buying good companies that pay dividends. But even these “forever hold” companies can get rich in price and may be ready to sell. People always talk about missing a few up days influencing performance. I think Barry pointed out they tend to forget about missing the down days may be a more critical time.

  34. jimc1004 says:

    All investment performance numbers are highly subjective depending on your begin point. Start with 2000 or the Fall of 2007 and your equities will look bad. Start with 2003, or 2009, not so bad.

    Short term stats are noise [what Jane Bryant Quinn called "investment porn"].

    As to the “long run” there are two relics on the stock exchange left from c. 1800 [both banks, both now part of massive financial behemoths]. What companies from the Civil War era are surviving – and even more pertinent, what if anything do they have to do with the investment world of today?

    In the long [and even near] term there is also a lot of survivorship bias in most of the numbers.

    Reversion to Mean can take a long time. “In the long run we are all dead” – Keynes

    If market timing is possible why did nearly ALL the biggest and best [Buffett, Princeton, Yale, Harvard] lose $ Billions in the Great Recession? If you sold on the way down you had to time your re-entry or miss the giant rally beginning in March 2009.

    What is hot one decade, usually really stinks in the next:

    “90% of what passes for brilliance or incompetence in investing is the ebb
    and flow of investment style (growth, value, small, foreign).”
    – Jeremy Grantham

    There are mainly two things that do not change from one investment cycle to the next, [and the next, ...]

    1) This time is NOT different.

    2) Human nature is always the same, euphoria/greed will alternate endlessly with fear/panic.