How to Use the New Buy-and-Hold Investing Method

Sometimes a classic perceived as obsolete just needs some freshening up to be viable again. This is true of the buy-and-hold strategy of stock investing.

For decades, buy and hold was a religion for professional and individual investors alike. The bible of this religion was Security Analysis, first published in 1934 by Benjamin Graham and David L. Dodd, and in several revised editions since.

The idea was that by assembling a highly diversified stock portfolio and leaving it alone for years — even decades — investors could build wealth gradually, experiencing lower volatility along the way. The method required the discipline to stick to an investment plan and resist the temptation of flavor-of-the-month stocks. It was an ideal investing model for busy dentists, who lack the time to monitor equity markets and engage in frequent trading.

Buy and hold’s venerable image took a hit in the financial crisis of 2008-2009, when many investors lost significant portfolio value, erasing much or all of their gains of the preceding 10 years — a period that became known as the lost decade. As a result, the strategy fell into disfavor.

Yet, buy-and-hold investing is still highly viable, but in a new form. We’ll call it the new, or modified, buy and hold. Like the old buy and hold, the new version relies on purchasing large, established, stable companies, which tend to pay regular dividends. Dividend investing is itself a classic investing technique that, for generations has helped provide a good way for investors to receive passive and generally increasing income from their stock holdings.

Like your father’s buy and hold, the new form of the strategy relies on a diversified portfolio — a core group — of companies for the long haul. These are stocks in sectors that historically have done well at all points in the economic cycle. Core holdings are the passive portion of a portfolio that generally includes stocks from companies that have consistently increased dividend payments over 15, 20 or even 25 years plus, so they’re meant to be held long term. The goal is to have the core portion of the portfolio composed of slow and steady growers that will likely provide stability in both good and bad markets.

Stocks serving as core holdings are typically from perennially stable sectors of the market, including: consumer staples, such as food and health aids (people eat and brush their teeth in good economies and bad); utilities (keeping the lights on is a necessity); health care, another necessity; and telecommunications (in a culture where smartphones have become essential).

Though well-chosen core holdings can probably be kept for 10 to 15 years or more, practitioners of this method shouldn’t have blind faith in them. Instead, they should stay vigilant and monitor not only performance but circumstances and events that might affect a stock’s longer term prospects, such as fundamental changes in the industry or competitive landscape.

The second investment category for buy-and-hold portfolio is referred to as satellite holdings, so called because they tend to revolve around the core group. These stocks are the the active portion of the portfolio, and tend to be held for shorter periods — generally for one to five years.

Satellite holdings are more strategic. They’re traded more frequently than core holdings to take advantage of economic cycles or company- and industry-specific trends and are designed to potentially boost the overall returns of the portfolio.

Sectors that are typically candidates for satellite holdings include: consumer discretionary, or non-essential consumer goods and services that people can forgo when they feel threatened by an economic slowdown and that tend to rise during times of increasing consumer confidence triggered by positive economic news; energy companies, which rise or fall with oil and gas prices; industrials, dominated by goods used in construction and manufacturing; materials (chemical companies, mining companies), buoyed by construction growth in upward economic times; and financials, whose financial services firms and banks may benefit from a rising interest rate environment in an expanding economy.

Satellite stocks tend to be more volatile, but volatility can be harnessed for potentially superior returns if you buy and sell at the right times, based on the economic cycle and how these companies’ will likely be affected by it.

Unlike your father’s buy-and-hold model, the point of the new version is to create an investment strategy that attempts to minimize large losses while capitalizing on market opportunities. In investing, slow and steady wins the race.

The new buy and hold strategy can hold big advantages for self-employed dentists, who are largely reliant on their own resources for retirement income, as it may be used for both pre- and post-retirement retirement portfolios. Retirees can continue to collect dividend payments to help fund their retirement income needs, and they can benefit from potential share-price appreciation.

Eric C. Jansen, ChFC, is the founder, president and chief investment officer of Wesborough, Mass.-based AspenCross Wealth Management, which provides fee-only retirement-income planning and investment-management services for high net worth clients nationwide.

The information presented is not intended as financial advice and you are encouraged to seek such advice from your financial advisor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Diversification/Asset Allocation does not ensure a profit or gurantee against loss. Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc. Member FINRA, SIPC, a Registered Investment Advisor. AWM is independent of Signator. One Technology Drive, Westborough, MA 01581. 026-20170120-345489