Reasons why passive “buy and hold” investing does not work

Why buy and hold investing does not work. The advocates of “buy and hold” investing claim that you should simply buy a portfolio of stocks and hold on through crashes. However the economy makes significant paradigm shift every 15 to 30 years and many companies refuse to give up what made them successful in the past and thus they fail to transition into the new economy and end up being marginalized.

A good example is to example the changes in the Dow Jones Industrials since 1970 only 20% of the stocks are still in the Dow. Thus buying the components of the Dow in 1970 and holding would have resulted in a holding today that has 80% unsuccessful investments and only 20% successful. (When I say unsuccessful in most cases they became unworthy of remaining in the Dow but did not go bankrupt; only a few actually went bankrupt). The stereotype of a DJIA company is that they are very strong, healthy, with a powerful moat to protect from competition. But the reality is that 80% of the constituent parts were not good investments. This demonstrates the importance of “active management” instead of passive ETF style investing.

I remember during the 1972 boom the news media was full of stories about the Nifty Fifty stocks that were similar to the Dow. They were called “one decision” stocks because the idea was you merely had to decide to buy them and then never decide to sell. Unfortunately these companies were overpriced and their prices dropped significantly in the crash the next two years. During the two years from 1972 to 1974 the market’s value plunged by 50%.

independent investment advice

Open the doors to carefully selected investments

Strategies to protect yourself

  • Use several diversified actively managed no load open-end mutual funds
  • Use mutual funds that attempt to buy companies that handle paradigm shift well
  • Have a fiduciary fee-only investment advisor select mutual funds for you

I have written about these topics in “Which is best: ETF’s or mutual funds” and “Fundamental investing rules”.

Important: Get more information in my free Special Report about emerging market currency investing.

Investors should seek independent financial advice.