Wednesday, October 4, 2017

Buy And Hold Is Not Buy And Forget

We have all heard it. Mainstream media pundits talking that 'buy-and-hold as a strategy is dead and gone, if ever it was a viable strategy.' Sorry folks, but I am not buying or holding their position on buy-and-hold. Buy-and-hold is neither dead, gone or even sick, but I will concede - it is misunderstood.

Walt Woerheide, a professor of investments at American College and co-author of the financial professionals' textbook "Fundamentals of Investments for Financial Planning," shared his views on buy-and-hold in an interview on Here are some of his notable comments when asked if buy-and-hold was dead:
No, absolutely not, and it never will be. It comes back to the fact that anybody who thinks they are going to outguess the market is going to be wrong as often as they are right.

You had to be correct about 80 percent of the time to beat a buy-and-hold strategy.

The biggest danger in trying to guess the market is being out when the market makes a big jump.

Every time you are jumping in and out, you're paying commissions.
However, buy-and-hold is not buy-and-forget. We must constantly monitor our holdings to ensure there is no deterioration in the underlying fundamentals of the stocks we hold. This concept was reinforced when I came across a couple of articles I wrote back in August 2008.

The first article listed my top 5 performing stocks for 2008 through July 31st. The stocks were:

Wal-Mart (WMT) | Yield: 2.6%
Canadian National Railway Company (CNI) | Yield: 1.7%
Health Care Property Investors Inc. (HCP) | Yield: 5.5%
Johnson & Johnson (JNJ) | Yield: 2.6%
McDonald’s (MCD) | Yield: 2.5%

An interesting note is that I still own four of the five stocks (sold HCP after it cut its dividend) and they continue to provide excellent life-to-date returns ranging from WMT's 12.0% to MCD's 15.8% (annualized). In addition CNI, and JNJ have provided double-digit annualized returns since I purchased them. Buy-and-hold continues to work well for all these holdings.

The second article focused on my bottom 5 performing stocks for 2008 through July 31st. The stocks were:

iStar Financial Inc. (SFI) | Yield: n/a
American Capital Strategies, Ltd. (ACAS) | Yield: n/a
SunTrust Banks, Inc. (STI) | Yield: 2.7%
First Industrial Realty, Inc. (FR) | Yield: 2.8%
General Electric (GE) | Yield: 3.9%

This group shared an interesting commonality - I no longer own any of them. Each stock was sold when the company announced a reduction in their dividend rate. This was a fundamental change that resulted in each stock no longer meeting my criteria as an income investment.

Buy-and-hold is a winning investment strategy when consistently applied over the long term. What is misunderstood by the detractors is that pruning your portfolio of investments that no longer meet your objectives, is just as important as the original selection (and holding) of the stock.

Full Disclosure: Long WMT, CNI, HCP, JNJ, MCD in my Dividend Growth Stocks Portfolio. See a list of all my Dividend Growth Portfolio holdings here.

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