The traditional belief that buying and holding shares will pay off in the long run has been blown apart by analysts who say this strategy has failed investors over the past 10 years.
The “buy and hold” approach to equities has long been at the heart of investing practices, with millions of pounds channelled into regular long-term savings plans each week.
But when equity markets plummeted in 2008, wiping out more than 12 years’ worth of investment gains, analysts argued that a long-term strategy for investors might have to be longer than 50 years – way beyond the time horizon for most people – to be sure of turning a profit.
Rob Arnott, head of the Research Affliliates, disputed the notion of “stocks for the long run” earlier this year in a paper entitled “Bonds: Why Bother?” for the Journal of Indexes. “Most observers, whether bond sceptics or advocates, would be shocked to learn that the 40-year excess return for stocks, relative to holding and rolling ordinary 20-year Treasury bonds, is not even zero,” he says.
He believes that the idea that stocks always win over the long term is “a dangerous fallacy”. “The notion that if we’re patient, it doesn’t matter what we pay for stocks, is foolish.”
The same can be said for investors who have bought and held the FTSE 100 over the past 10 years. “Although it has been a rollercoaster ride over the last decade, there is little difference between the opening and closing levels of the UK stock market,” says Hugo Shaw, investment manager at Bestinvest, the independent financial adviser. “As a result, a buy and hold strategy, which can be demonstrated by looking at an index tracker, has not returned very much.”
He says that although the long-term view works on some levels, say, if an investor buys a stock cheaply and waits until prices have gone up to sell, this is still reliant on buying at the right time.
Some of the reasons why buy and hold has not worked in the past 10 years include:
The longer the investment horizon, the more important the dividend income. But stockbrokers say that
only a minority of investors reinvest their dividends back into their core portfolio holdings, with most investors trading in and
out too quickly to set
up reinvestment plans.
Algy Smith-Maxwell, a manager on the Jupiter Independent Funds team, says that the best buy and hold strategy is “to buy into solid, lowly-geared businesses with a tangible product to sell and reinvest the dividends back into the businesses”.
If investors bought cheap tracker funds and never traded them, they could see steady returns on their money over the very long term. But they don’t – they go in and out of the market and the charges incurred by constant trading destroy the returns.
Investors who bought cyclical stocks in industrial, retail or property companies will have seen those stocks go up in price and come back down again. “In any 10-year period, these types of companies are bound to make profits and then lose them again as margins are put under pressure by new entrants,” says Mick Gilligan, head of research at Killik & Co.
Buying at the top
People who follow trends often tend to buy popular stocks when they are expensive. “Stocks get brought to your attention as the company is getting interesting and the price is on the way up. Eventually, it will fall out of favour and the value will decline,” says Justin Urquhart Stewart, director and co-founder of Seven Investment Management. “Investors have to wait a long time for it to come back into favour.”
Some analysts argue that other equity strategies can provide better returns.
Investors can use different methods of identifying whether a company is trading below its intrinsic value, such as screening for low price/earnings (p/e) ratios or low price-to-book values or high dividend yields.
“The key to successful stock picking is to distinguish between companies that are simply out of favour and those with poor prospects,” says Chris Kenny, investment director at Smith and Williamson investment managers.
Other analysts argue that surviving these volatile times is more about timing moves in and out of the market using indicators such as spikes in daily price swings, momentum, the widening of credit spreads and economic indicators.
“The notion that buy and hold is the best way to make money in the market is not appropriate any more,” says Gary Potter, co-head of multi-manager funds at Thames River. “What matters now is the cost of an asset.”
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