Buy and Hold Caveats

By on June 9, 2010

Systematic Relative Strength blog has an interesting article on the buy and hold philosophy. The post has an enlightening insight borrowed from Money Magazine:

William Bernstein of Efficient Frontier Advisors discusses findings from a study by Dimensional Fund Advisors. The article gets to the thesis early:

It’s a little-known and depressing fact, but the majority of individual securities tend to post negative returns over the long run.

But there’s more from Bernstein:

In fact, researchers at the investment management firm Dimensional Fund Advisors found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago’s CRSP total equity market database.

As for the bottom 75% of stocks in the U.S. market, they collectively generated annual losses … over the past 29 years.

The lesson seems to be that if you’re going to buy and hold, do it with a very broadly based index.

Source: Systematic Relative Strength


  1. Dividend Inc. Team

    June 9, 2010 at 10:09 pm

    "The lesson seems to be that if you're going to buy and hold, do it with a very broadly based index."

    In your opinion, would it be a stretch, or wishful thinking, to try to target the 25% of stocks that generated the gains over the 29-year period?

    Your thoughts appreciated.

  2. stocksystm

    June 10, 2010 at 12:49 am

    Dorsey Wright Money Management produces the blog and their assertion is that they can pick the superstocks that show superior relative strength. I would be interested in seeing their results in the real world. I believe they are implying that an investor sell when the relative strength of a stock weakens. This would require substantial babysitting of the portfolio and best be done in a tax-deferred account.

    I think by purchasing stocks with strong franchises when they hit a patch of weakness, one may outperform the market by a smidgen. I also believe in more diversification rather than less and keeping trades to a minimum.

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