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Buy and Hold, Anyone?

Buy and Hold is a classic approach to investing. It’s a passive way of “managing” investments. The idea is simple enough: put a portfolio in place, and then leave it alone. Over the long-term, volatility will be ironed out and the market will gain.

It’s a great idea. It just doesn’t work.

But it’s not just that buy and hold doesn’t work. It’s that buy and hold hasn’t worked for a long time. That’s because the market is in a long-term cycle that investors can’t buy and hold.

Secular trends are long-term (usually around 20 years) market trends: a secular bull trend brings the market up, and a secular bear trend brings the market down. Today, we are right in the middle of a long-term bear market that started in 2000. This chart speaks volumes about what a buy and hold strategy would have achieved over the past 12 years…basically nothing. In a market like this, uninvolved investing won’t work.

Buy and hold isn’t relevant in today’s market. But that wasn’t always the case. Secular bull markets create wealth, so by nature it was a winning strategy during the secular bull market of 1982 to 2000.

Secular markets are nothing new. History is riddled with long-term, secular market trends (interspersed with short-term cyclical ups and downs). We experienced long-term bear trends in 1901, 1929, 1966…and 2000.

And long-term bear markets that punish buy and hold investors aren’t unique to the US. Japan’s market is a perfect example of why not to buy and hold…for a really long time. Looking at the Nikkei 225 index, Japan’s market is now in the 22nd year of a secular bear trend.

But it’s not just a matter of looking at history. It’s a matter of looking at today’s reality. The market has become an increasingly complex place, and its complexity requires an active approach to investing. Buy + hold = gains, just doesn’t add up. The equation has to include when to buy…and when to sell.

The market is telling us that buy and hold simply doesn’t work. Investors can’t put their money down and expect the market to carry their portfolio higher, unless they are patient enough to wait for the next secular bull market to emerge…in another decade or so.


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