Don't Buy and Hold Individual Stocks


The investment industry tells us that creating stock portfolios is easy. Just buy great stocks and hold them forever, they say.

In fact, the industry often says you can just pick stocks you're familiar with. Own an iPhone? Buy AAPL. Buy things on Amazon? Buy AMZN. Again, it's so easy.

Let's look at how well this approached worked. I pulled up the oldest financial filing I could find for the Vanguard 500 fund, dated 2003. This year was also the start of a bull market, which is favourable to the stocks in question.

The top 10 holdings of this large cap fund were: GE, MSFT, PFE, XOM, WMT, C, JNJ, AIG, IBM, INTC. These were the greatest "blue chip" stocks at the time, with the largest market caps. Magazines and TV personalities endorsed them. Everyone owned them.

Presumably then, one could buy and hold them forever. What happened when you did? These 10 stocks (with 6 sectors) make a pretty nicely diversified portfolio. This would have been considered a pretty great portfolio at the time.

The following figures are total cumulative returns, including dividends, since 2003-01-01.

Stock Total return
GE -8.2%
MSFT 554.1%
PFE 155.8%
XOM 270.3%
WMT 151.2%
C -72.6%
JNJ 300.8%
AIG -93.7%
IBM 162.3%
INTC 351.8%
Average 177.2%

And SPY (the S&P 500 index ETF) returned 345.4%


First, notice the enormous spread in the results. Some stocks collapsed. GE, the stock with the largest market cap in the world at the time, actually lost money even though we're starting at the market bottom (2003). At the other end of the spectrum we have MSFT returning 554%, which was unforeseeable at the time. In fact, MSFT was "dead money" (no return) for the first 9 years.

The portfolio's result is disappointing. SPY, the index, had twice the performance of this buy-and-hold portfolio!

So much for buying and holding individual stocks that look good to us. Even though we chose well-regarded, popular stocks, in a sector-diversified portfolio, at the start of a bull market, and patiently held them for over 15 years, we did significantly worse than the stock index!

Don't buy and hold individual stocks

Buying and holding entire asset classes is a good idea, and can easily be done with broad index funds. However, individual stocks shouldn't be bought and held forever. If you're going to hold individual stocks, you need to manage your portfolio. You need to prune the losers, add new winners, and rebalance. This isn't easy to do.

Indexes such as the S&P 500 and TSX Composite are more active than people think. The index itself is constantly adapting. Poor stocks are eliminated, and new up-and-comers are added. Strongly performing stocks and sectors gain market cap, and thus gain higher weights.

And that's why the S&P 500 performed much better than just its top holdings did, over 15 years.