Passive And Buy-And-Hold Investing Doesn’t Work Unless...

Not only was buy-and-hold a very poor investment strategy over this time frame, it should have also been obvious to investors that the market entered calendar year 2000 significantly overvalued. Clearly, both buy-and-hold and passive investing as investing strategies over this time frame was – as previously stated – a dumb move. But even more importantly, it would have been obvious to value investors that this was a bad time to be investing in the index and an even worse time to be a buy-and-hold investor. 

When growth and value are aligned

This next graph illustrates the benefit of applying a buy-and-hold strategy to the index when growth and value are aligned. The adjusted operating earnings growth for the S&P 500 over the 10 year time frame 2010 through 2019 was 10.19%. Moreover, the beginning valuation was moderately high at a P/E ratio of 18.18, however, the ending valuation offered P/E expansion to a P/E ratio of 19.96 by December 31, 2019.

Therefore, the result was a total annualized rate of return of 12.5% including dividends paid but not reinvested. Clearly, this illustrates that buy-and-hold was a successful strategy even though beginning valuation was a little high but not excessive as we saw in the first example.

The next series of graphs portrays three companies over the time frame 1999 to current, that illustrate how effective a strategy buy-and-hold can be. At varying degrees, each of these companies possess extremely consistent and strong earnings growth, and each was reasonably valued at the beginning date of this time period. Our first choice, Apple Inc. (AAPL), provides an example of a pure growth stock that morphed into a strong dividend growth stock.

My second choice, Ross Stores (ROST), provides an example of a growth stock with a dividend component. Note that I calculated performance from my starting date to my fair value reference line (the orange line) on the graph. However, Ross Stores, as good as performance would have been had the stock only traded at fair value, it was even better as a result of it currently being overvalued as illustrated in the performance graph that followed.

My third and final choice, Ameriprise Financial Inc. (AMP) provides an example of a dividend growth stock where valuation was attractive at the beginning and undervalued at the end of the time frame. Nevertheless, despite its low ending valuation buy-and-hold turned out to be a great investment strategy for shareholders in Ameriprise Financial Inc. This once again illustrates how powerful buy-and-hold as an investment strategy is when valuation and growth are both aligned.

Each of these examples provide undeniable evidence that a buy-and-hold investing strategy works extremely well when the right companies are originally purchased at the right valuations.I offer this as compelling evidence that the buy-and-hold strategy, done right, is a great and prudent way for people to invest.  

When Buy-And-Hold Is A Bad Idea

However, with the following examples I illustrate when buy-and-hold is a bad idea. The primary point is that you can’t simply make a general or universal statement that buy-and-hold is an effective strategy or not. The truth always depends on valuation and the success (growth) of the investment purchased.

Ascena Retail Group (ASNA)

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Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit ...

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