Buy and hold, or actively manage as times change?

As a young man, I fell in love with the Alfa GT Junior sportscar. To me, there was no car more beautiful. It didn’t matter to me that technology, luxury and handling had improved over the years, I believed that if you were lucky enough to find one of these beauties, it would be the last car you own. About 15 years later, I finally managed to buy a 1976 model and I could hardly contain my excitement. Make no mistake, I enjoyed this car immensely, but what I imagined I would be driving, and what I actually ended up driving, were two very different cars. Compared to modern cars, the 1976 Alfa was a bumpy ride, it was uncomfortable and, in many ways, highly impractical.

What does this have to do with investing? Well, Warren Buffett has famously said that his favourite holding period for a share is “forever”. But as time goes by and the world out there changes, our investment environment also changes.

I regularly attend consultations and presentations where investors and even experts recommend that investors should simply “buy the 10 largest locally listed shares and keep them”. These 10 shares make up 60% of the total market, and more importantly, there is a reason why they have become the 10 largest shares. How can you go wrong? I’m not saying that the 10 largest shares are in any way poor choices at all, but you need to keep in mind that just because my Alfa GT Junior was the best car on the market in 1976, definitely does not mean that it still is today.

If you had followed a buy and hold strategy at the turn of the millennium, Dimension Data and/or Datatec surely would have been part of your portfolio. Both shares initially provided excellent portfolio growth, only for Didata’s share price to tumble from R75 per share in 2000, to below R2 in 2003, while Datatec saw its price drop from R146 per share in 2000 to below R4 in 2008.

Many investors would be eager to point out that this refers to the bursting of the Dotcom bubble, and that it’s unlikely to be repeated, although I think that’s highly debatable.

When we turn back the clock to 15 years ago (May 2005), you will see that there was no sign of Naspers in the top 10 largest shares listed on the FTSE/JSE Top 40 Index, although all 10 of those shares still find themselves in the Top40 Index today. It is therefore safe to say that none of those 10 shares were bad shares. Secondly, and more importantly, 45% of the Top40 Index consisted of resource shares. Today, 15 years down the line, this weight stands at 30%. The reality is that if you had followed a buy and hold strategy in 2005, roughly 50% of your portfolio would have been invested in resource shares.

If you had invested R100 each in the FTSE/JSE All Share Index, and a portfolio consisting of the top 10 largest shares on the local market 15 years ago, your R100 investment in the JSE would have been worth R375 today (4 May 2020), while your buy and hold strategy investment would have been worth only R230.

My conclusion is that we can’t just assume that a buy and hold strategy is the best approach to follow under all circumstances. The world is constantly changing, and it is important to make sure that your personal investment portfolio keeps up with those changes.

Graph: FTSE/JSE All Share Index vs top 10 buy and hold shares since 2005