Is Buy-and-Hold Investing Dead? Not Necessarily

Many buy-and-hold investor have been whipsawed by the volatile stock market during the last few years. The arrival of each monthly brokerage statement has investors fearfully asking, "Have I lost more money or is my portfolio recovering?"

The chart below of percent returns versus daily purchase dates for the S&P 500 (^GSPC) tells the story of a jittery market and resulting fluctuating returns for buy-and-hold investors.

The chart is a visual explanation of why so many investors are put off by the stock market. Of the 3,775 possible purchase dates (daily closing price) from January 25, 1995 through January 22, 2010, 47.68 percent made money (green areas) if held until January 22, 2010. The other 52.32 percent of the investments were unprofitable (red areas).

Click chart to enlarge it.

Computational note: The percent return for each of the 3,775 purchase dates is computed as the difference of the closing price on Friday, January 22, 2010 and the closing price of the purchase date dividend by the closing price of the purchase date. Note: All prices are taken from Yahoo! Finance.

Nasdaq Returns

Nasdaq (^IXIC) investors did somewhat better as 70.96 percent of all buy-and-hold investments made money.

Click chart to enlarge it.

Individual Stocks - Winners

But even as the broad market generated sustained periods of loses, many stocks held up and delivered profits for most of their purchase dates. Here are six large-cap stocks with profitable buy-and-hold records for over 90 percent of the 15-year investment dates: BHP Billiton (BHP), Colgate Palmolive (CL), Diamond Offshore (DO), International Business Machines (IBM), McDonald's (MCD) and 3M (MMM).

Percent Returns Vs Purchase Date - Profitable (Click chart to enlarge)
BHP	CL	DO
IBM	MCD	MMM

Individual Stocks - Losers

On the other hand, many stocks were losers. Here are six stocks that made their investors see red for over 90 percent of the investment dates: Citigroup (C), DELL (DELL), DryShips (DRYS), General Electric (GE), Pfizer (PFE), and Regions Financial (RF).

Percent Returns Vs Purchase Date - Unprofitable (Click chart to enlarge)
C	DELL	DRYS
GE	PFE	RF

Buy-and-Hold?

So what's the verdict on buy-and-hold investing? Does it lead to profits or losses? For a long-term bull market such as the period from 1982 through 2000, buy-and-hold makes sense. During a prolonged upside most stocks and broad averages are headed up, so almost all investments are winners. But during the aftermath of a multi-year bull run, a broad brush investment approach such as buy-and-hold is problematic because many stocks are headed to the downside.

In a volatile market, long-term investors need to be very selective. Pick stocks with long histories of price appreciation or, at least, price stability. And consider owning dividend-paying stocks to bring in real cash as you wait for stock prices to head to the upside.

Create Your Own Percent Return Charts

Use the buyupside.com Stock Return/Purchase Date Calculator to display the percents returns for any stock available at Yahoo! Finance.

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Posted January 30, 2010.