Buy and Hold Investing has taken a beating in the press over the last year or so. What was once a very popular method for investing in the stock market has been maligned, mocked, and even cursed in the news media, and some investors have given up hope that it actually even works. Hindsight is always 20/20 though.
Is Buy and Hold Dead?
I don’t think that investing in the stock market for long periods of time is a bad proposition, I think it still has merit and is probably the way to go. But you have to realize that Buy and Hold does not mean Buy, Hold, and forget about it. There are very few investments that don’t require you to pay attention to them. The stock market is certainly not one of them.
Buy and hold means you are invested for the long haul, and are not jumping in and out of the market based on short term trends or trying to make quick profits. It does not mean you cannot re-allocate your portfolio, or diversify it properly by changing your asset allocation, and it does not mean you have to stick with under performing mutual funds, such as in your 401k, for example.
One of the problems is that we can get caught up in things when times are good, and follow the crowd, so to speak.
Remember the tech bubble in the late 90’s? Everyone wanted to talk about the latest “hot” stock they had a tip on and picked up for a few dollars, which they were sure would become the next Microsoft. Why? Because everyone thought the tech bubble would just keep on rising, and never burst. Instead of taking profits and being happy, a lot of people got greedy.
The same thing happened in the real estate market, for some people. Some speculators thought they could buy a house, slap a coat of paint on it, and “flip” it for a profit a few months later, not thinking that at some point prices were going to come back down to earth.
It is hard to do, but one of the most successful investors of our time follows this advice:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
– Warren Buffett
And his mentor said the following regarding balancing of your investment assets:
This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines.- Benjamin Graham
The buy and hold philosophy can still work, and you don’t need to get involved with trading individual stocks or funds on a regular basis, by keeping the following in mind:
- Pay attention to your asset allocation- Does your asset allocation reflect your risk tolerance and when you plan on retiring?
- Re-balance after significant rises or declines in the market or your investments- Do you re-balance your portfolio regularly?
- Keep an eye out for under performing funds- Are you holding on just for the sake of holding on? Selling something because it is not performing well does not mean you are not in it for the long haul, it just means you are smart! (It doesn’t mean changing funds or investments every few months, though.)
- Stay diversified- Are you diversified? Buy and Hold doesn’t mean buy only stocks. Consider bonds, real estate, and other commodities or asset classes to keep your nest egg diversified.
- Avoid the hot stocks, don’t follow the crowds- Do a little research, and treat “hot stock tips” like they are worth what you paid for them
Remember: Buy and Hold does not mean buy and do nothing!
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Buy and hold gets a beating in any recession. If anything, recessions should prove the point that you can’t beat the market and it’s best to ride the waves up and down.
Buy and hold works in the long run. And most of the time, the market moves up. But when you’re caught in the trough during a cyclical period, and you need money, that’s not a good situation. The market isn’t for everyone. And it’s certainly not for people that need their money in a pinch. Looking at your financial obligations in the long run, and paying particular attention to when you plan to enter or exit the market should also impact the % you put into the market.
This was a good read for me. I’d always thought of buy and hold as ‘buy it, put it in a safe place somewhere, and come back and check 40 years later.’ I’ve got some good stuff to think about now!
@The Weakonomist- I agree- although recessions and down turns seem to scare people into timing the market at the wrong time.
@Dana- I think you are right- part of the problem is probably due to the fact that some people are too heavily weighted in the stock market, as opposed to being insafer investments when they may need the money.
@Jeff- Thanks, glad you enjoyed. When times are good buy and hold seems to work that way, but this recession shows that allocation and diversification can play a very important role.