From time to time, I read articles saying that growing numbers of financial advisors and stockbrokers are abandoning the traditional buy-and-hold strategy. For instance, one article stated that some brokers were taking new approaches more in tune with the new “macro-economic climate.” That sounds suspiciously like just another way of trying to guess what will happen next. Often, this abandoning of the buy-and-hold strategy seems to crop up when the market is down or at least in a state of turmoil which leaves investors uncertain. For decades – as long as I’ve been involved with the stock market – some brokers have claimed that they favour the “buy and hold” investing strategy in principle, but that the market is now so treacherous and unpredictable that their clients have to indulge in short-term trading, options or whatever to make any money. Brokers have powerful economic incentives to recommend this kind of switch. The alternate investing methods they recommend involve higher fees. These fees leave their clients far less likely to make significant profits, but they virtually guarantee that the broker’s income will go way up. Investors generally resist this switch. They recognize that you can’t predict market swings, but you can profit from long-term growth in the economy, and from the wealth creation that takes place in well-established companies. However, investors become more receptive to the idea in the late stages of a market downturn, when the alternate strategies have beaten “buy and hold” for a year or two. The funny thing about all this is that “the traditional buy-and-hold strategy” is written about much more than it is practiced by most investors. [ofie_ad]
Buy-and-hold-till-I-get-bored and other misguided approaches
Most people describe themselves as buy-and-hold investors. But for many, their strategy is more like buy-and-hold-till-I-get-bored, or until I hear about something better on cable TV. Another common variant of the strategy is to buy-and-hold-till-the stock goes up, then take my profit and brag about it to anybody who will listen. When the stock goes down instead of up, these investors may switch to buy-and-hold-while-the-stock-goes-down, then-sell-when-it-goes-back-up-to-what-I-paid-for-it. Of course, there are a variety of ways to build an investment portfolio. Some work better than others. Ours has done well for our clients and readers over the past few decades.
High-quality stocks are your best protection
We start by applying our three-part Successful Investor rule for portfolio construction:
- Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
- Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
- Downplay or stay out of stocks that are in the broker/public relations limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.
Obviously, it is easier to hold high-quality stocks that perform well over time. But we do not recommend that you hold indefinitely. We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit. In short, our strategy is not a strict “buy and hold” but rather “buy and watch closely.” COMMENTS PLEASE: Do you think of yourself as a buy-and-hold investor? Or are you more of a trader? How long have you followed your current strategy and how has it worked out for you? Let us know what you think in the comments section below. Click here.
