Buy and Hold Caveats
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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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.
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.