Why is it that the strategy of buy and hold is under such scrutiny?  Why isn’t buy and hold the strategy we hear about from either young or old investors these days?

Buy and hold certainly not the ‘in’ strategy and not something that would be very popular when everyone has some sort of angle on how to game the market.  Let’s not forget, it’s probably the most boring strategy because it’s probably the most straight forward strategy one can imagine.

The above notions of buy and hold being boring and that it has a tendency to get lost in all of the noise heard throughout the investment community might be true.  To determine whether or not the investment strategy of buy and hold still make sense in our present day investing environment one should consider the past behavior of the market and whether or not it is indicative of an investing environment where buying and holding stocks makes sense.

(I’m only considering a simply historical analysis, an analysis of general future market movements would add further weight to this argument, but I neither have the model or the type for that today.)

If we use the S&P 500 as our default index for what we refer to as “the market” then we will see that since the late 90′s market behavior has distinctly changed.  The market’s growth pattern has gone from relatively steady incremental gains with minor corrections to much more pronounced increases and decreases in value.  Swings in market activity are much more dramatic than anything seen between 1960 to the late 1990′s.

S&P 500: 1960- May 2011

With this increase in market price variability we no longer have a market that has continued a slow, but stead climb up in value.  We have a market that has climbed high, fallen low and come back somewhat.  What will tomorrow bring?  If the last 10-13 years are any clue it will be something more dramatic than mundane.

A market that behaves in a more dramatic than mundane manner in its growth does not bode well for investors looking to buy and hold.  Stock accumulation has much more systemic risk involved than before, since the entire market is more prone to very pronounced swings in value.  Therefore, an investor must incorporate a mechanism within their buy and hold strategy that indicates when hold should be abandoned for sell.

To conclude, if the behavior of the market of the last 10-13 years continues into the future, investors should not be satisfied with buying and holding a stock or fund.  Proposing that investors deviate from a buy and hold strategy does involve more risk.  Yet, I would argue that buy and hold investors have already taken on more risk from simply investing in a market that behaves that way our current market has.  If you expect the market to continue in its dramatic ways, then you should consider a different strategy than strictly buy and hold.