Avoiding the 3 Pitfalls of 'Buy & Hold' Investing
Rumors of the demise of 'buy & hold' investing have been greatly exaggerated, to say the least. This strategy is as relevant in the current pandemic market environment as it is in normal times.
Stocks have made a strong recovery since the March 23rd bottom, with the major indexes now close to the all-time record levels reached in early September. This rebound followed the sharpest market downturn in history, in which stocks lost more than a third of their value after peaking on February 19th.
The tens of thousands of new investors that have entered the market during the pandemic appear to have gravitated towards active trading instead of building long-term portfolios. They seem to have bought into claims from purveyors of market timing who never tire of reminding us that the ‘buy & hold’ investment strategy was no longer relevant to the current environment.
It is important to remember that long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it has ever been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of this investing strategy over any other approach.
But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:
1) 'Buy & Hold' Doesn't Mean 'Buy & Forget’
Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.
Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well-informed of what is going on with each of their holdings and stay ready to make necessary adjustments as market conditions evolve.
More . . .
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2) Don't Fall for the 'Buy What You Know' Mantra
Guard against the simplistic beauty of the 'buy what you know' mantra; another one of those skin-deep lessons learned from Warren Buffett's investment style.
Adherents of this 'philosophy' load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years.
Being familiar with a company's product(s) is a useful, but not necessary, starting point to 'knowing' the stock as an investment opportunity. The decision to buy the company's stock should follow a thorough, due diligence process that gives you a solid appreciation of the company's prospects, competitive position and the proper value of its stock, particularly in the context of the portfolio as a whole.
In fact, studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks.
3) Stick with a Plan
Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change.
I am not suggesting that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the market.
For example, the pandemic-driven economic downturn has created solvency concerns for many companies in industries that are victims of social-distancing policies like airlines, hotels, restaurants, etc. But we know that the unprecedented fiscal and monetary stimulus provides more than sufficient ‘bridge’ for the economy to bounce back at the other end of this downturn.
In other words, if you have a longer holding horizon, it hardly matters whether the shape of the recovery resembles a ‘V’ or a ‘U’, i.e., an instant recovery or a slowly unfolding one. What matters is that there will be a recovery and many of these companies will thrive if they have the financial wherewithal to withstand the next few months of pain.
And you must stay nimble and flexible enough to adjust your positions should your outlook change.
Putting It All Together
Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. Note that we here at Zacks have been successfully managing a number of long-term investing portfolios that practice such 'buy and hold' investing strategies.
In fact, in 2019 our long-term portfolios closed 55 double- and triple-digit gains. Already in 2020 there have been 47 more, including several wins such as +142.9%, +178.6% and +251.1%.¹
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Sheraz Mian is the Director of Research. He manages the Zacks Equity Research team of analysts and is one of the country’s leading analysts of aggregate corporate earnings. He manages the Zacks Focus List and Top 10 portfolios.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.