Is Buy and Hold Dead? (probably)

Posted on November 30, 2011 by


Today, November 30, 2011, the market was up 4.3%

read related articles

I’m glad I was in the market today

You’ve probably heard the advice that market timing is a bad idea because if you exit the market you’ll miss the dramatic up days (like today).  Many, well respected investment advisors tell us that market timing is a bad idea.  Here’s an article at CBS News from December 2009 advising against market timing:

The road to investment hell is paved with market-timing efforts because so much of the long-term returns provided by the market come in short and unpredictable bursts. For example, one study, covering 107 years ending in 2006, found that the best 100 days (out of more than 29,000) accounted for virtually all (99.7 percent) of returns.

But wait!

This article in Forbes tells us:

Proof of the fallacy of buy-and-hold as a strategy is easy enough to find. In the 1929 crash and its aftermath the market lost 86% of its value and did not get back to its 1929 level until 1955, twenty-six years later. That was 26 years of waiting for buy and hold investors (if there still were any) for the market to ‘come back’.

Here’s another article making the same point.

Who’s right?

There’s really two different issues here that should be treated separately.  First, yes, blind buy and hold is dumb.  You need to actively manage the equities you hold.  Market cycles move more quickly now, especially if you’re investing in tech stocks or commodities like gold or oil.

But timing the market is impossible, especially the whole market. My view is that timing the entire market is tough because it is driven by truly unknown factors such as 9/11, bank failures, secret negotiations between Germany, France and Greece, and so on.

What is one to do?

The first thing to observe is that it really is possible to separate good companies from bad.  Buy good companies (of course).  But that’s not the complete answer.  Even if you held the 20 best components of the S&P 500 in 2009 you would have lost 40% in the down turn.

The rest of the answer is that you’ve got to have hedged positions too.  That doesn’t necessarily mean you have to short stocks, but you do need to consider equities that zig when the rest of your portfolio zags.  Gold, oil, bearish funds and short ETFs can accomplish this.  The trick is to find the right mix.

I’ll say more about that in coming posts.

Disclosure: Tucker Balch was up too late.