Choosing a strategy: buy & hold vs trend-following

A strategy is a set of rules that tells you what to own and when. Having one — any sensible one — matters more than finding the perfect one. For private investors with limited time, two approaches stand out.

Buy & hold

Buy a diversified set of assets, hold them for decades, rebalance occasionally. Buy & hold is cheap, simple and has worked well for broad stock indices over the very long run.

Its weakness is the path. Buy & hold fully experiences every crash — −50% or worse for stocks several times in the past century — and some markets took decades to recover: Japan after 1989, the Nasdaq after 2000, many commodities. Most investors who fail with buy & hold fail because they sell during those crashes.

Trend-following

A trend-following strategy stays invested while a market's trend is up and steps aside — into Treasury bills, for example — when it turns down. It does not predict; it reacts to what prices are already doing.

Its strengths: it aims to avoid the deepest, longest declines, it works across asset classes, and it has a long track record among professional funds. Its weaknesses: it is always a little late, it can be whipsawed in sideways markets, and in strong, uninterrupted bull markets it can lag buy & hold.

How they compare

On the market pages you can see both side by side for 30 markets: long-term return, maximum drawdown and Sharpe ratio. In many markets the trend strategy earned a similar or higher return with a much smaller worst-case drawdown — the trade-off that matters most for people who need to stay the course.

What to look for in any strategy

• Simple, clear rules you understand.
• Tested across many markets and decades, not tuned to one chart.
• Realistic costs included in the backtest.
• A drawdown you could live through.
• A routine you can follow in less than an hour a month.

Key takeaways

• Any disciplined strategy beats improvisation.
• Buy & hold is simple but suffers every crash in full.
• Trend-following aims to cut the deepest drawdowns, at the cost of lagging at turning points.
• Choose the approach you will actually stick with.

By Dr. Harry Hamann · 7 min read