Chapter 11
Buy and Hold: The Baseline Strategy

Imagine two investors.

One spends decades studying charts, watching CNBC, poring over technical indicators, and trying to jump in and out of the market at just the right moments. The other picks a broad-market ETF like SPY, buys it, reinvests all dividends — and then simply holds. No signals. No stress.

Who wins?

Surprisingly — or perhaps not — the second investor often comes out ahead.

Data from over a century of market history shows that most active traders fail to beat the market over the long term. Fund managers are no exception. The S&P 500 has outperformed the majority of mutual funds and hedge funds, especially after fees. And the few strategies that do outperform tend to involve complexity, leverage, or long stretches of underperformance.

Buy and hold has quietly, steadily created fortunes — not from timing brilliance, but from the simple power of compound growth and staying invested through thick and thin.

It’s not an exciting story. But it’s one that works.

Take Warren Buffett, who famously said that his favorite holding period is “forever.” Or Jack Bogle, founder of Vanguard, who dedicated his life to helping ordinary investors build wealth through low-cost index funds and long-term discipline. Even after a lifetime of investing, Buffett recommends the same strategy for most people: buy an S&P 500 index fund and hold it.

In this chapter, we’ll test that idea. We’ll simulate what happens if you bought SPY in 1993 and never sold — and compare it to QQQ, a more volatile tech-focused ETF. The numbers speak for themselves.

11.1 Introduction to Buy and Hold

Buy and hold is a strategy of deliberate inaction. You buy, and you wait. That’s it.

You don’t react to headlines. You don’t flinch during crashes. You don’t try to predict interest rates, election outcomes, or GDP reports. You place your bet on long-term economic growth — and let time do the work.

It’s simple, but not easy. The hardest part is psychological: resisting the urge to do something during moments of fear or euphoria. Buy-and-hold investors lived through the dot-com crash, the Great Recession, the COVID-19 panic, inflation scares, and interest rate shocks. The strategy only works if you stay the course.

That’s why it’s a perfect baseline. Any strategy we evaluate should be compared to buy and hold. If a new idea adds complexity but fails to beat this passive approach, it’s probably not worth using.

11.2 SPY Buy-and-Hold Backtest

To evaluate buy and hold with real numbers, we ran a backtest from 1993-01-29 to 2025-07-09, using daily adjusted close prices for SPY. This ensures that the impact of dividends and stock splits is fully captured — just as an investor would experience in a dividend-reinvesting brokerage account.

The full interactive backtest is available at BackAlpha.com.

Performance Overview

• Start date: 1993-01-29
• Initial price: $24.38
• Final price: $624.06
• Initial investment: $10,000
• Final value: $255,967.57
• Total gain: 2,459.68%
• Annualized return: 10.51%

These numbers reflect more than three decades of growth. A $10,000 investment grew into more than a quarter million dollars — purely by holding SPY and reinvesting dividends.

This is not just theory. These are real, adjusted, total-return numbers — what you would have earned with a real account and no market timing.

Volatility and Drawdown

Of course, buy and hold is not without risk. The biggest test of investor discipline came during the 2008 financial crisis:

• Peak: 2007-10-09 at $112.10
• Trough: 2009-03-09 at $50.23
• Max drawdown: 55.19% over 517 days

More than half of the portfolio value vanished — on paper — in under two years. Many investors panicked and sold. Those who didn’t eventually saw the recovery, but it required nerves of steel and a long-term mindset.

Why Adjusted Close Matters

Dividends make up a substantial portion of total returns. The close price only reflects the trading price, but the adjusted close includes dividends and splits. Ignoring this would understate SPY’s true performance.

Buy-and-hold investors don’t just benefit from price increases — they also receive quarterly payouts, which get reinvested and compound over time. This “silent engine” drives a significant portion of long-term gains.

Calmar Ratio and Risk-Adjusted Return

To account for both return and risk, we compute the Calmar Ratio:

This relatively modest value reflects the reality of equity investing: strong returns often come with significant drawdowns. In later chapters, we’ll test strategies that aim to raise this ratio by reducing downside risk without sacrificing return.

11.3 QQQ Buy-and-Hold Comparison

QQQ tracks the Nasdaq-100, which includes many technology and growth-oriented companies. Let’s see how it performed over a slightly shorter window:

• Start date: 1999-03-10
• Initial price: $43.23
• Final price: $556.25
• Final value (from $10,000): $128,659.48
• Annualized return: 10.19%
• Max drawdown: 82.96% over 926 days
• Calmar Ratio: 0.12

At first glance, QQQ seems like a strong contender. But it delivered a lower return than SPY — and its drawdown was brutal. From the peak in March 2000 to the bottom in October 2002, QQQ fell over 80%. That’s not just a dip — it’s a wipeout.

Psychologically, very few investors can hold through an 80% loss. Recovering from such a decline takes not just market growth but enormous emotional resilience.

11.4 SPY vs. QQQ: Which Is Better?

When comparing two strategies, we must weigh both return and risk. SPY and QQQ delivered similar returns over the long run — 10.51% vs. 10.19% — but the difference in drawdown is stark.

• SPY: 55.19% drawdown
• QQQ: 82.96% drawdown

That difference isn’t just theoretical — it’s behavioral. A strategy that loses 55% is hard to hold. A strategy that loses 83% is nearly impossible.

Conclusion: SPY is the superior buy-and-hold vehicle. It offers slightly higher returns, dramatically lower drawdowns, and broader sector exposure. For long-term investors seeking resilience and compounding, SPY is hard to beat.

11.5 Common Misconceptions

Critics of buy and hold often point out that "just holding" exposes you to every crash. That’s true — but it also ensures you never miss the recoveries. Most of the market’s long-term gains come from a handful of big up days. Missing just a few of them can dramatically lower your return.

Others argue that buy and hold is boring. But boring can be beautiful when it comes to building wealth. Unlike strategies that require constant attention and decision-making, buy and hold lets you step away and let compounding do its job.

11.6 Why This Strategy Matters

Buy and hold is not just a beginner’s strategy — it’s a benchmark. It requires zero effort, zero forecasting, and zero timing. If any active strategy can’t beat this baseline, it’s probably not worth your time.

In the chapters ahead, we’ll explore techniques that attempt to improve on this foundation — through trend-following, market timing, and leverage. But no matter how advanced things get, the question remains:

Can it beat buy and hold?

Let’s find out.