Rumors of the demise of ‘buy & hold’ investing are greatly exaggerated, to say the least. We hear about this strategy’s death after every downturn; the latest one being no exception.
In fact, I Googled the phrase ‘buy & hold is dead’ and got 60.9 million results in response. I am not exaggerating this; go check it out for yourself.
It is understandable that investors would question this old school approach following the roller-coaster ride of the last two years. But long-term investing, particularly a ‘buy & hold’ approach, remains as relevant today as it ever has been. Despite the recent weakness and naysayers’ wishes, empirical evidence continues to show the long-term superiority of a ‘buy & hold’ strategy over any other investing approach.
But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:
‘Buy & Hold’ Doesn’t Mean ‘Buy & Forget‘
Staying engaged with your portfolio is a must. Investing for the long run doesn’t mean that you lose sight of developments in your portfolio. The ‘buy & forget’ mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.
Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what’s happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the ‘buy & hold’ investing approach, he is by no means the only. And all of the successful practitioners of this approach stay well informed of what is going on with each of their holdings.
Don’t Fall for the ‘Buy What You Know’ Mantra
Guard against the simplistic beauty of the ‘buy what you know’ mantra; another one of those skin-deep lessons learned from Warren Buffett’s investment style.
Adherents of this ‘philosophy’ load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years.
Being familiar with a company’s product(s) is a useful, but not necessary, starting point to ‘knowing’ it as an investment opportunity. The decision to buy the company’s stock should follow a thorough, due diligence process that gives you a solid appreciation of the company’s prospects, competitive position and stock value.
In fact, studies show that people have a crippling blind spot when it comes to stocks they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but it usually is a treacherous disaster in your portfolio.
Stick With a Plan
Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change.
I am certainly not suggesting here that you need to have an outlook for the GDP growth rate for the next quarter or next year, but you absolutely need to have a base outlook for the economy and the markets.
If you expect a major economic downturn in the coming 12 – 18 months, your choice of investments would be very different from someone looking forward to a goldilocks-type scenario.
You must stay nimble and flexible enough to adjust your positions should your outlook change.
Putting It All Together
Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. Note that we here at Zacks have been successfully managing an annual ‘buy & hold’ portfolio for many years. We call it our “Zacks Top 10 Stocks” portfolio.
We construct this portfolio by first taking a look at the economic outlook and what that means for stocks. Then we narrow in on what industries are set to outperform and avoid the others like the plague. From there we use our proprietary stock-rating systems to help select the best stocks in those favorable groups.
How Has It Worked So Far?
In 2009 we had a phenomenal +34.1% return, well outpacing the market averages.
I head the team that selected the Zacks Top 10 Stocks for 2010 and look forward to helping you achieve market-beating returns this year as well.
Today, in fact, the market turmoil is offering an ideal opportunity to get these companies at discount prices. They include an education company poised to grow at the expense of under-budgeted state schools, an energy powerhouse riding one of the strongest rebounding economies in the world, and a retailer with earnings projected to boom more than 20%.
Learn more about Zacks Top 10 for 2010.
Best,
Sheraz Mian
Sheraz is the Director of Research at Zacks. He oversees all the stock analysts who provide insights and stock reports on Zacks.com. He is also leading the stock picking team in charge of the Zacks Top 10 for 2010 service.
