Buy-and-Hold Investing Can Make You Rich, but Not the Way You Think
The best stock I ever bought was pure luck.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The conventional Wall Street wisdom is that the average person should invest in the stock market by simply holding an index fund. This approach was popularized by Jack Bogle, the founder of the Vanguard Group, who spent decades advocating low-cost, long-term, passive ownership of the whole market through the S&P 500.
The logic is seductive. Over the long haul, the market has returned an average of around 10% a year, and compounded over decades that turns modest sums into substantial wealth. If you had invested $1,000 in the S&P 500 at the start of 1991 and reinvested the dividends, you would have about $45,900 today, an annualized return of 11.4%. Hold for another ten years at 10% a year and the power of compounding really becomes apparent as the account grows to roughly $119,000.
It sounds like a simple and reliable path to financial freedom. So why do so few people travel it?
Lost Decades
The first problem is what that 10% average really means. It is calculated over roughly 70 years since the modern 500-stock index was created in 1957, and the market has never moved in a smooth 10% line. There have been long stretches when the indices went nowhere. If you bought at the peak of the dot-com bubble in 2000, you had nothing to show for it a decade later.
From 1968 to 1982, stock prices were flat for 14 years, and while reinvested dividends kept returns positive, inflation consumed most of the purchasing power. Japan is the extreme case. The Nikkei 225 peaked in late 1989 and did not reclaim that level until 2024, a wait of 34 years.
Averages are no comfort when your peak investing years occur during a decade-long malaise.
Real Life Gets in the Way
The second problem is that the textbook model assumes you leave the money untouched for 30 or 40 years. Real life brings job changes, medical issues, family needs and emergencies that do not care about your time horizon. When you are forced to tap the principal, the compounding is derailed, and replacing capital is much harder than withdrawing it.
Even more common is simply not having surplus cash in your twenties and thirties, which are the years when compounding establishes its foundation. Many people cannot build meaningful capital until much later in life, and that compresses the timeline the whole strategy depends on.
The Buffett Model
Some investors look at all this and conclude that the answer is to skip the index and follow the Warren Buffett model instead. Rather than own the whole market, the idea is to hold a few high-quality core positions for decades. Buffett is known for holding names like Coca-Cola (KO), Apple (AAPL) and the insurer GEICO, and the combination of dividends and compounding made him one of the richest men in the world.
The approach appeals to investors because it sounds so simple. Just hold a good stock for a long time. It is deceptively difficult. Finding a stock that will be a market leader for the next 50 years is the hardest thing to do in investing, and Buffett himself has said that only a few such opportunities will appear in a lifetime.
Fooled by Hindsight
The mistake investors make is thinking this approach’s effectiveness is primarily a function of holding a stock for a long time. The reality is that its power depends more on stock selection than anything else. Many folks are fooled because they look at it retrospectively. It is easy to look back and think that, if I had just bought a stock like NVIDIA (NVDA) or Apple (AAPL) or Amazon (AMZN) and held it for years, I could be the next Buffett.
But ask yourself this: What stock in the market today is the equivalent of those big winners? That is the challenge, and it’s nearly impossible. The odds say most picks will be duds. Arizona State professor Hendrik Bessembinder studied every U.S. stock going back to 1926 and found that just 4% of them accounted for all of the market’s net wealth creation. The rest, as a group, did no better than Treasury bills.
Buffett rejected thousands of stocks in his career that did not meet his standards for long-term ownership, and at times he traded actively. Even Apple was not sacred. He sold roughly two-thirds of the position in 2024 while it was still Berkshire’s largest holding. He did not just buy a few stocks and forget them, but that is what many people who try to emulate him do. They embrace the idea of long-term buy and hold, but they have no process for finding a stock that is worthy of it.
My Best Long-Term Trade Was Pure Luck
I know how seductive this thinking is because I am living one of the best versions of it: my best long-term holding is Altria (MO), which I bought in the mid-1990s through a dividend reinvestment plan. It has been one of the best-performing stocks in the market since then. The big dividends compounded, and along the way came the spinoffs of Kraft Foods and Philip Morris International (PM), which went on to produce spinoffs of their own. Jeremy Siegel’s research found that Philip Morris, as Altria was known back then, was the best-performing stock of the original 1957 S&P 500.
I would like to tell you I saw all of that coming when I sent in my first small check. I didn’t. I did well with the position, but I attribute it to luck rather than skill. Could I find the next one today and hold it for 30 years? Probably not. Nobody can do it systematically, and one lucky hold is not a process.
That is the trap in all of these stories. The people who bought a great stock early and held it point to it as proof that anyone can do the same. The ones who bought General Electric or Sears at the highs are not bragging about it.
The Hard Work That Makes It Work
There is a strange snobbery about all this. Trading is treated with disdain while people look down their noses and proclaim themselves long-term investors, as if it were a badge of honor. They have it backward. The long-term investor with no process for picking stocks and no process for selling them is not being disciplined. They are being passive and calling it a virtue. To be a great long-term investor, you first have to be a shorter-term investor who rejects many ideas before finding the ones that work.
Finding good long-term investments is hard work. If it were easy, it would not make you rich. You need a process for finding the best stocks, and you need a process for weeding out the many that turn out to be duds. That means staying engaged with your holdings, checking whether the story you bought is still the story you own, and being willing to admit when it is not.
Buy and hold can build substantial wealth, but not because it is passive. It works when there is constant effort behind what you hold and why. Investing is hard, and that is exactly why it can make you rich.
At the time of publication, DePorre was long AMZN, MO and PM.
