Clark Wealth Management Group - ScotiaMcLeod Fredericton

Some have questioned the wisdom of buying and holding equity investments in modern markets. As the information flow increases causing investors to focus on day to day market volatility, buy and hold seems to make less sense. But is it because buy and hold doesn’t make sense any more, or is it because people are looking at things from the wrong perspective?

The foundation of the “buy and hold” strategy is based on the fact that established publicly traded businesses have a management team and board of directors whose purpose it is to make that business better. An improved business generally will translate into improved profitability and increased valuation for those who own the business. As time passes, through several business cycles, we expect the value of a business to increase. It’s that simple.

It works. For example, if you had purchased common shares in the following businesses in May 1991 and reinvested dividends, what follows is your total rate of return over that period of time (all expressed in C$):

• Proctor & Gamble   715% or 11.05% annually
• Exxon Mobil   754% or 11.32% annually
• Coca-Cola   475% or 9.14% annually
• BCE Inc.   1,765% or 15.74% annually
• Bank of Nova Scotia  2,599% or 17.90% annually

Clearly there is little need for investors to play around trading shares in businesses like these attempting to buy low and sell high a few times each year.

While it works well in some circumstances, buy and hold definitely is the wrong strategy for most speculative investments. Not only do they not typically have a robust management team and board but they tend to lack diversity in their business mix making them more susceptible to a changing business environment. The same applies to some cyclical businesses which are dependant on volatile commodity markets. Properly timing when to buy or sell speculative and cyclical investments is tough. In many cases it falls somewhere between being very difficult and downright impossible. For this reason, most people would be well advised to limit any investment in these areas of the market.

Something that has definitely changed in the past decade however is the velocity of money in markets. Because of technology improvements, reduced costs, and the number of participants who are day trading in markets there is a lot more money flowing in and out of investments a lot faster. That has created the increased daily volatility we see. It has not changed the underlying principals that make buy and hold work for many great investments.

Buy and hold is not a failed experiment, it is a valid and enduring strategy. Market environment changes described above make it even more important for present day investors to be selective when deciding what investments they will buy to hold for the long term.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.