Buy-and-hold investing is not dead, study says

Stocks are far less risky than you think, and there are advantages to sticking with them over the long haul.

By MSN Money Partner Feb 18, 2014 1:45PM
Portfolio Account statement © Alamy Creativity, AlamyBy Chuck Jaffe, MarketWatch

Most people try to reduce risk in their investment portfolio by seeking safe havens like bonds, or by moving money out of the parts of the market that scare them at any given moment.

But what if the best way to minimize risk was to simply buy and hold stocks for the long run?

In a world where many investors seemingly have given up on the idea that buy and hold can work, some new research from two college professors and the head of retirement research for Morningstar Investment Management suggests that stocks become less risky the longer you hold them, research which suggests that "set it and forget it" could be pretty good investment advice, and that you should overweight your portfolio toward stocks, even as you age and most people are becoming more conservative.

It's important to note that David Blanchett of Morningstar, Michael Finke of Texas Tech University and Wade Pfau of the American College were not talking about holding any specific individual stocks for the long haul, just indexes or baskets of stocks. As Blanchett noted on my radio show this week, "I wouldn’t recommend just going out and buying [General Electric] (GE), I'd recommend buying a broad index."

There are a lot of reasons why some investors, intuitively, believe that stocks are inherently more risky the longer you stick with them. For starters, there is the idea that the longer you stick with a portfolio, the more market gyrations, downturns and corrections you will live through. 

You're strapping yourself to the market rollercoaster, which does not guarantee that it will be up -- or even back to your starting point -- when the time comes that you have to get off.

The longer you are in the market, the more uncertainty you face -- especially in today's wacky socio-economic and political climate -- and plenty of folks translate "uncertainty" as "risk."

Then there's the basic idea that if the market becomes less risky over time, it would create what amounts to a free lunch for anyone who sticks around long enough to enjoy it. For anyone who believes in "efficient markets," that's anathema; the market is supposed to finds those edges and advantages and exploit those strategies until they are useless and dead.

The concept behind the new research involves "time diversification," an idea that experts and academics argue over, with some suggesting it's real and powerful and others saying it doesn't exist.

You've heard of diversifying into different asset classes and across the international landscape and more, but time diversification simply suggests that the longer holding period effectively diminishes the effect of any short-run period, as has happened to folks who rode out the financial crisis of 2008 by sticking with the market through its ups and downs to get to its recent highs.

In short, investors are more risk-averse -- they want to feel certain of bigger returns -- during downturns and recessions, but are willing to accept more risk when the market is growing, and time diversification assumes that these swings will even out.

"One would think that in theory holding a diversified portfolio of cash, bonds and stocks creates the most amount of wealth 20 years from now," Blanchett said. "That actually isn't the case. If you look back over history, holding stocks over the long haul has been the optimal thing to do . . . and this effect of time diversification has actually been increasing, so the benefits to long-term investors have been growing over the last 110 years, not shrinking, so holding equities is actually a better and better thing to do."

The research does not change the fact that there are still going to be good and bad times to buy stocks, it simply points out that investors benefit from being more aggressive -- in the broad mix of stocks/bonds/cash, it suggests going more in the direction of equities than you might otherwise have been leaning -- and from hanging on.

It's worth noting that the research covered 20 countries and over 100 years in those markets, and that it does not suggest investors give up on diversification -- internationally, by company size and more -- nor does it suggest that investors ignore personal factors like time horizons that create short-term needs that make sticking around for the long-run impossible.

While Blanchett noted that economists might call doing a little of each strategy irrational if you believe the research that shows long-term providing that free lunch, he noted that doing a bit of each -- having some very long-term money for part of a portfolio and another portion for short-term, trading-oriented activities -- probably would make many people comfortable.

That said, the new research gives investors who had been hearing, feeling and otherwise thinking that buy-and-hold investing is dead a big reason to feel like maybe their investment philosophy has more merit than it has been given credit for.

It also gives them a reason to tilt their portfolios toward equities, despite the nervousness most investors have been feeling toward stocks since the turn of the century.

"The longer your holding period, the more aggressive you really can and should be. For an investor with an infinite time horizon -- let's just say 20 or 30 years -- probably the lowest risk long-term investment for that investor is actually stocks," Blanchett said. "Throughout history, holding a portfolio of all stocks has actually been less risky of all cash, if you look at the final income value after 30 years.

"The kicker is that people tend to look at their account statements on some regular intervals and they feel that pain long-term," he added. "But really if you were going to buy something, put it in a lockbox and then come back and check it 20 years from now, hands down that would be stocks."

More from MarketWatch

Tags: GE
Buy and Hold never was dead....  Its always been slighted since investor gurus paid on commission dont make any money when you do that.

Buy reasonable risk investments with diversification and hold them. Check up on everything once in awhile but dont sell in a market panic becasue you were wise enough to buy reasonable investments.

Sit back and watch....

Feb 18, 2014 2:29PM
But and hold is not dead, but we get saturated with the message that it is dead. Why? Because brokers get paid per trade, regardless of whether or not you make money. The more you churn, the more they earn. 

Consider the source.
Feb 18, 2014 2:09PM

Well DUH !


I've trying to spread the word for sometime now ! Buy Large Cap, Iconic Product Stocks that pay dividends, have dividends automatically reinvested. Buy as many as you can say about 20-30 Stocks ( Think DOW Aristocrats) Sit back and relax. Check ocasissionally to make sure the companies aren't having major problems and retire when ready.


Now that was easy !

Feb 18, 2014 3:01PM

The first time I purchased a stock was on a recommendation from a co-worker and I lost my shirt on that investment. Instead of being turned off on purchasing equities I did my own research and had much better results.


One of the features I look for with a stock is if it has a dividend reinvestment plan (DRIP). When I first started investing I did not have a lot of money and purchasing companies that had DRIPS was a good way for me to start small and grow my investments over a long period of time.


I have been investing in stocks for over twenty five years. I purchase many high quality companies and have done very well over time. I am a firm believer in the buy and hold philosophy of investing. I learned by starting small and gradually buildings on your initial investment are also a very good ways of achieving wealth and generating income. Buy and hold, dollar cost averaging, and the magic of compounding are all great tools for the investor.   



Feb 18, 2014 3:08PM
I have always traded for gains. Long term, Short term, if there was a profit, I took it.  I am one of the "you wont go broke taking a profit" investors.  I have left some nice profits on the table by getting out "to soon"  I have put myself in a bad tax category by having more ST profits than deductible losses but I have never had a loosing year. I started this investment program when I was in the Air Force in Korea in 1951/3 (until the ceasefire in 1953) I came back to the states, reentered college in 1954 and continued my program of always trading for gains over the past 60 years. I never allowed a stock broker to control my account or my trades and I never will.  I will make my own mistakes,  loose my own money, and when I die, I will leave my family a substantial estate.
Feb 18, 2014 2:33PM
Knowing when to hold'em and knowing when to fold'em; Is the tricky part...
Feb 18, 2014 4:25PM
Why would it be dead? Investing with the discipline to be diversified and withstand "noise" is the optimal way to invest over the conventional attempt to find "mispriced" securities which translate into transferring money from investors to Wall Street.
Feb 18, 2014 2:45PM
Being an active trader for seven years, buy and hold has seen my portfolio grow with the ROI at 67%. The majority of the holdings are blue chips and oil, nice growth but since opening the portfolio I have also reinvested the dividends. Growing into more shares and therefore more dividends. When I retire the dividends will **** to my income leaving the base alone.
Feb 18, 2014 3:37PM
If you buy great stocks you`re almost always set.How many down years has Berkshire had?
Feb 18, 2014 5:29PM
Why it's 'probably too late' to buy US stocks
7 hours ago and now
Buy-and-hold investing is not dead, study says
4 hours ago

A poster mention how this would happen today as per usual, too freaking funny.

"Management suggests that stocks become less risky the longer you hold them, research which suggests that "set it and forget it" could be pretty good investment advice, and that you should overweight your portfolio toward stocks, even as you age and most people are becoming more conservative."

This statement just ignores the FACT that soon, yearly Federal deficits here will be a Trillion Plus per year. This statement just ignores the FACTS concerning the Major funding issues of Social Security and Medicare since the Funds have been stolen.

This statement is merely BS cooked up to play folks into the Market to infinity while Big Money is always cashing OUT. The House of Cards will come tumbling down. And since we have gone so long without a Correction or a really long Bear Market, Odds are we shall experience exactly those results. Gravity demands it. The Law of Averages demand it. You don't continually get something for nothing, the Globally FEDS want you to believe otherwise. It's not a crime to lock in Profits.

Feb 18, 2014 2:52PM

Step right up SUCKERS and CHUMPS!! your bets on today's manipulated buys and wait for the day's hedges to work the system...


  Offthedole is not associated with any of the pre-described stocks that he is luring you to invest in...well...just in case it sinks on shorting or other casino-type ripoff method...NEXT!

Feb 18, 2014 1:59PM
IMO, buy and hold is dead, and has been for sometime now.  Buffett used to say that you should buy a solid stock and hold it forever.  That advice just doesn't hold true anymore.  If you're not actively watching your investments and don't have solid exit strategies in place, you're setting yourself up for failure.

Remember, we're in uncharted waters here, and past performance is most certainly NOT an accurate predictor of future results.  Cash flow is everything.  It is foolish to measure wealth using the alleged value of paper assets.  Instead, measure wealth by the amount of cash flow your assets can consistently generate.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.