Buy and hold overbought?

In an 2001 article on Barclay Group’s site (requires registration) entitled “Buy and Hold: A Different Perspective” Richard Rudy, a hedge fund manager states that

The “buy and hold” investor has been led to believe (perhaps by an industry with a powerful conflict of interest) that if he has tremendous patience and discipline and “stays with it” he will make a good long term return. These investors fully expect that they will make back most, if not all, of recent losses soon enough. They believe that the best place for long-term capital is the stock market and that if they give it 5 or 10 or 20 years they will surely do very well. Such investors need to understand that they can go 5, 10 and 20 years and make no return at all and even lose money

If, however, investors can uncover an approach that can earn 12% to 15% a year with little correlation to the market and without the kinds of historical drawdowns offered by the market, then, when compared to the market, they should think about the choice very carefully indeed.

If you compare this to a standard portfolio allocation approach with funds Dimensional Fund Associates, e.g. choose four or five standard asset classes which are not very well correlated with each other, then buy investment vehicles for each, and hold them for the long term. It is important that the investment chosen — like those DFA funds — have low expense fees, pay as little as possible in commission and slippage, and do not follow the crowd in order to find stocks for that asset class. The results are very impressive.

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