Buy and Hold Caveats

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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
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2 Comments

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.

   Reply
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.

   Reply