Is Buy and Hold Dead?

All of the world’s most successful companies have experienced challenges, and the majority have had periods when their stock traded at alarmingly low prices. Shareholders that stayed committed to their buy and hold strategies were ultimately rewarded for their discipline and patience.

The recent health scares, record-high inflation, rising interest rates, and economic uncertainty have driven stock prices down – in some cases, by 60 percent or more – and there is a loud group of worried investors that has declared that the traditional buy and hold strategy is dead.

They insist that picking short-term winners and timing trades to get in at the bottom and out at the top is the only way to make money in the modern market. Are they right? Is buy and hold dead?

Why Is Buy And Hold Dead?

The data show that short-term investments are becoming more popular. Back in the 1970s, most investors held stocks for five or more years, but that figure has been below one year since 2020. Does that mean investors have lost faith in the buy and hold strategy since the pandemic? The short answer is no – at least, the world’s best investors have not.

The headlines reporting that “buy and hold” is dead are – at best – an attempt to engage readers. There is no “news” in these stories – it’s a tactic to get clicks. The same rumors that buy and hold is dead are documented as far back as the early 1990s, though at that time, there was no internet – writers wanted to sell papers and magazines.

It’s true that the average stock holding period has dropped from five years to less than one year in the past 45 years, but today’s shorter holding periods aren’t breaking any records. In 2008, investors held stocks for an average of just three months.

So, why are holding periods getting shorter, if buy and hold is not dead?

Why Holding Periods are Getting Shorter

It’s common for investors to sell stock during periods of economic uncertainty, because they give into the fear of losing their entire portfolio. As a result, holding periods get shorter when the market is trending down, and they get longer during bull markets. But that’s not the whole story.

In the 1970s, there were very few shareholders in the category that is now referred to as “retail investors.” Trades were completed manually using paper forms, and licensed brokers were involved in every transaction.

It was difficult to buy less than one hundred shares of an individual stock, which meant that the market was only open to those with substantial wealth. Most investors had some level of market expertise, or they relied on experienced brokers to make trading decisions – and they paid large per-trade fees and/or commissions for every transaction.

The introduction of self-directed online brokerage platforms changed all of that. Anyone can open a no-fee/no minimum balance account in minutes, and single-share trades are welcome. In fact, some platforms offer the opportunity to purchase partial shares of stock.

Online trading was beginning to get popular before the pandemic hit, but it really took off during the 2020-21 period. So many people were at home and online trading was an attractive way to stay busy – and make a little money. After all, economic stimulus efforts meant a bear market, and it seemed like everything was going up.

Short-term trading blogs and social media groups were everywhere, and many amateurs decided to give trading a try. Most dabbled in day trading and swing trading, and very few found any real success. Of course, they didn’t yet know what top investors have learned through experience: the buy and hold strategy remains one of the most reliable methods of building long-term wealth.

Is Buy And Hold Still A Good Strategy?

Legendary investor Warren Buffett (net worth $116.7 billion) likes to say that his “favorite holding period is forever.” He discovered the pitfalls of fear-induced selling when he was a teenager, and that experience formed the foundation of his investing strategy for the 80+ years that followed.

Now, Buffett buys high-quality stocks that have a sustainable competitive edge – what he calls a “moat” – and he trades when they are available at value prices. For example, when the market goes down and stocks are at rock bottom, he doesn’t sell with the crowd – he buys.

Warren Buffett and other successful investors know that historically, the market always recovers its losses and goes on to reach new highs. Sure, that can take several years after an economic crisis like the Great Recession of 2009, but long-term investors can wait. When they do, they are far more likely to realize profits than peers that sold at the first sign of trouble.

Consider Affirm Holdings, a recent example of a promising company that has been on a pricing roller coaster:

Affirm launched in 2012 with a brilliant idea. Instead of credit cards, why not offer short-term point-of-sale loans for online purchases? E-commerce companies clamored to partner with Affirm, knowing that sales go up when consumers have access to credit. Affirm stock went public in January 2021, and share prices doubled within a day.

In November 2021, tech stocks were in high demand, and many – including Affirm – hit all-time highs. However, rising inflation and increased interest rates frightened investors away from tech stocks, and the entire tech sector saw a dramatic decline in 2022. Now it’s on its way up again.

Since it went public, Affirm doubled in value, dropped 60 percent, gained 160 percent, dropped again, and then recovered some of those losses. It is still down 90 percent since its November 2021 high and down 80 percent since its IPO, but the company hasn’t given up the fight.

Affirm recently announced a new partnership with Amazon, and analysts believe it has the technology and brand to maintain a competitive edge. Meanwhile, researchers expect the Buy Now Pay Later (BNPL) market to grow roughly 29 percent annually through 2032, which bodes well for Affirm’s long-term revenues.

Shareholders who sold Affirm stock when it dropped from its IPO price missed opportunities to recover their initial investment more than a year later, and it appears that Affirm has a real shot at long-term success. Short-term shareholders won’t see any of those gains, but those who choose a buy and hold strategy could be in on the ground floor of an amazing opportunity.

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