Buy-and-Hold Investing – For Better or for Worse?

The recent bear market has rendered many investment strategies – like “buy and hold” – obsolete, while the latest 30% rally has rekindled the hope that investors may be able to buy-and-hold their way back to profits after all. Before you make a decision, here are a few must-know facts to consider.

Are you married to your buy-and-hold strategy? If so, you may want to consider a divorce (metaphorically speaking). From October 2007 to March 2009, many got to experience firsthand the “for worse” part of buy-and-hold investing. The Dow Jones (NYSEArca: DIA) lost 7.839 points or 54.90%.

Just before being snuffed out entirely, hope returned to Wall Street. Since the March lows, the Dow has rallied as much as 2.217 points. Patiently waiting for portfolios to recover all their losses has once again become a viable option. See sobering facts below:

Despite the recent rally, which lifted the Dow by as much as 34.43% and the S&P 500 (NYSEArca: SPY) by as much as 28.31%, there is a long road ahead to reach the break-even point. Based on Dow 8,200, the stock market would have to rally another 72% just to reach October 2007 levels.

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Even at an optimistic 12% annual return, it would take nearly five years for the broad market to recover to previous bull market levels. Chances are that the Financial Select Sector SPDRs (NYSEArca: XLF) won’t even come close to their high watermark within the next 10-20 years. This may sound absurd, but we’ve seen what happened to tech stocks after the dot.com bubble.

After briefly poking above 5,000 in March 2000, the Nasdaq (Nasdaq: QQQQ) hasn’t even come within 2,000 points of its all-time high. When the S&P and Dow reached all-time highs in 2007, the Nasdaq still traded 44% below its lofty 2000 high. The same is true for the Technology Select Sector SPDRs (NYSEArca: XLK).
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