Letting Go: The Death of Buy & Hold

NEW YORK (TheStreet) -- The past two years of panic and uncertainty may have finally sounded the death knell for "buy and hold."

The investment strategy was pushed forward in the 1970s by Vanguard founder Jack Bogle, who believed time was on his side. A lot of other fund managers shared his view, and helped enforce its grip on conventional wisdom. It's easy to see why.

"Buy and hold" is simple: Pick a company with good "fundamentals" and a bright outlook. Buy its stock. Wait for it to appreciate.

The catchy slogan doesn't directly address how to pick stocks -- or the exit ramp -- but investors have accepted it nonetheless. The simplistic view of the market's inflationary nature was proven out over a very long period of time. During the 20-year bull market that preceded the so-called aughts, there were a few downturns that helped to reinforce the belief that "buy and hold" would endure.

The Unraveling

During the 1980s and 1990s, the average annual return on the S&P 500 was 15%. At the start of 2000, the index was 14 times higher than it was at the start of 1980 -- despite four down years and several mini-crises that were thought to be significant at the time, but pale in comparison to the subprime bubble and its enormous ripple effects.

The decade of excess that followed wiped out much of those gains -- in confidence as well as outright returns. The '00s represented the worst period for stocks ever recorded, including the Great Depression.

Among the few winners were those who bought into rallies and quickly let go, or those who shorted the housing market and financial stocks, rather than placing long-term investments.

In fact, the average amount of time that an investor holds a stock has plunged from 10 years at its height in the 1940s, to six years in the mid-70s, when the term "buy and hold" was popularized, according to an analysis by Société Générale. In November 2009, the average duration dropped below one year for the first time on record, according to NYSE data. (As James Montier, a respected asset-allocation expert who authored the SocGen report put it, "Under this time horizon, the only thing that anyone cares about is: What is going to happen next quarter?")

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