We have all heard it: mainstream media pundits talking about "the lost decade" and how "buy-and-hold as a strategy is dead and gone, if ever it was a viable strategy." Sorry folks, but I am not buying or holding their position on buy-and-hold. Buy-and-hold is neither dead, gone or even sick, but I will concede — it is misunderstood.
Walt Woerheide, a professor of investments at American College and co-author of the financial professionals' textbook "Fundamentals of Investments for Financial Planning," shared his views on buy and hold in an interview on BankRate.com. Here are some of his notable comments when asked '"Is buy-and-hold dead?":
No, absolutely not, and it never will be. It comes back to the fact that anybody who thinks they are going to outguess the market is going to be wrong as often as they are right.However, buy and hold is not buy and forget. We must constantly monitor our holdings to ensure there is no deterioration in the underlying fundamentals of the stocks we hold. This concept was reinforced recently when I came across a couple of articles I wrote back in August 2008.
You had to be correct about 80% of the time to beat a buy-and-hold strategy.
The biggest danger in trying to guess the market is being out when the market makes a big jump.
Every time you are jumping in and out, you're paying commissions.
The first article listed my top five performing stocks for 2008 through July 31. The stocks were:
Walmart (NYSE:WMT) | Yield: 2.8%
Canadian National Railway Company (NYSE:CNI) | Yield: 1.8%
Health Care Property Investors Inc. (NYSE:HCP) | Yield: 5.1%
Johnson & Johnson (NYSE:JNJ) | Yield: 3.5%
McDonald’s (NYSE:MCD) | Yield: 2.8%
An interesting note is that I still own each of these stocks and they continue to provide excellent life-to-date returns ranging from WMT's 5.2% to MCD's 23.9% (annualized). In addition, HCP and CNI have provided double-digit annualized returns since I purchased them. Buy and hold continues to work well for all these holdings.
The second article focused on my bottom five performing stocks for 2008 through July 31. The stocks were:
iStar Financial Inc. (SFI) | Yield: n/a
American Capital Strategies, Ltd. (NASDAQ:ACAS) | Yield: n/a
SunTrust Banks Inc. (NYSE:STI) | Yield: 1.0%
First Industrial Realty Inc. (NYSE:FR) | Yield: n/a
General Electric (NYSE:GE) | Yield: 3.7%
This group also shared an interesting commonality — I no longer own any of them. Each stock was sold when the company announced a reduction in their dividend rate. This was a fundamental change in the companies that resulted in each stock no longer meeting my criteria as an income investment.
Fortunately, I was able to get out before the worse part of their decline. Several of the companies have not recovered to where they were prior to the dividend cut.
Buy and hold is a winning investment strategy when consistently applied over the long term. What is misunderstood by the detractors is that pruning your portfolio of investments that no longer meet your objectives is just as important as the original selection (and holding) of the stock.
Full Disclosure: Long WMT, CNI, HCP, JNJ, MCD. See a list of all my dividend growth holdings here.
- 8 Dividend Stocks With Above Market Performance
- 7 Dividend Stocks For The Ultimate In Deferred Gratification
- Finding Low Risk Dividend Stocks
- Why We Are Dividend Growth Investors
- What Determines A Dividend Stock's Yield
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