Buy & Hold – is 3-word phrase often glamorized by market veterans and newbies alike. And to be honest, it’s easy to be a buy-&-hold investor with markets doing well. You buy something for Rs 1000 and see it slowly move up to Rs 1500, Rs 2500 and beyond. You look smart just by being there – holding it and doing nothing.
But reverse the situation.
You buy that same thing for Rs 1000 and unluckily for you, the bear market begins. It slides down to Rs 900, then to Rs 750, Rs 600. You end up looking like a fool for holding it.
It’s not easy to be a Buy-&-Hold investor in Bear markets. That is the reality.
But that is the very reason this works!
Participating in a rising market, it’s extremely easy to picture yourself holding through a bear market, eagerly waiting for it to end so that the big gains resume.
But in reality, the pain that people go through (both emotional as well as financial pain) watching their money go down by 10%, 20%, 30% and even 50% is something else. It cannot be described in words. And when the emotions eventually do take over, these investors exit booking big losses.
The buy-&-hold strategy ends for them at just the worst possible time.
Have a look at the charts below. These charts show Nifty levels for 3 different but continuous periods spanning over 11 years:
- Jan 2006 to Dec 2007
- Jan 2008 to Mar 2009
- Mar 2009 to July 2017
First chart depicts the ‘Joys of Buy & Hold between 2006 to 2007’. As you can see, it was easy to just hold on as markets were moving up.
Then came the great crash of 2008-09.
No doubt, it was not easy to ‘hold’ on to the investments when markets fell by more than 50% in just an year!
Most investors cannot handle those kinds of losses and would have sold off at this point. At this point, being a buy and hold investor doesn’t look good at all. And you as an investor would need a thick skin to accept publically that you are still holding on.
But that is exactly why this strategy works for those who follow it over the full Bull-Bear-Bull Market cycle.Here is something very relevant that was written by Jason Zweig, a noted investment writer:
But maybe it’s fine that buy-and-hold is out of fashion. To prevail as a successful long-term investing strategy, buy-and-hold has to go through a prolonged period when it no longer seems to work. As its weakest believers give up and fall away, buy-and-hold will ultimately emerge stronger.
And almost all investors today know what happened after the great fall of 2008-09.
For those who held on to the strategy even after going down during the previous period (as depicted in previous graph), the result is eye-popping:
This is the real joy of Buy-&-Hold after you have gone through the pain of Buy-&-Hold. To earn that return of 285%, the investor had to first endure the loss of 58%.
For the strategy to truly work the way it’s supposed to, investors need to hold on (and even buy more) during bear markets.Of course that is not easy. And that is where investor behaviour comes into picture.
Just knowing about buy-and-hold is not enough. You have to actually do it to deserve the high returns that come after that. As noted Financial writer Nick Murray say: “Wealth isn’t primarily determined by investment performance, but by investment behavior.”
Buy and hold isn’t for everyone.But for those who accept the short term unhappiness for better long-term results, it can create significant wealth.