We have heard the term “buy and hold” investing is good and market timing is bad. Before we think about this too much, it is important to accurately define what we mean. Let's start with buy and hold. We will discuss market timing later. This is important because if nobody can agree on a definition, then everybody can always be right, based on their definition. Here are the questions you should consider before claiming that buy and hold is always the best investing strategy.
- Is it applicable to ANY security I buy? What if I buy a mutual fund and never sell it? The fund manager is buying and selling inside the fund all the time. Am I the one that never sells? Is it prudent and a good strategy for them to do that but not me? Does buy and hold only apply to non-professionals?
- Does it mean I can NEVER sell? How long do I have to wait before I can sell to still be considered buy and hold - 6 months, 2 years, 10 years? Who decides that? How far do I have to let it drop in price before selling? What if I could only stomach a 15% loss but another investor could let it drop 50% before selling. Is the "hold" based upon my original intention and unique to each investor's risk tolerance?
- Even if you could define the parameters that apply to everyone, would it make sense to compare this strategy to another one that buys and holds something that mirrors some broad index? Many indices have committees that decide the holdings. They can decide to remove a holding if it drops too much in price or if they decide it is not relevant anymore. Have you ever heard that you can do that with a buy and hold strategy?
Definitions matter. You cannot debate something if you cannot first define it.
There are periods of time when buy and hold would have been a better approach, and there are times when it would not have been. We have spent years researching non-emotional investment strategies that seek to put your investments in the best approach, at the right time. Please find our long-term results here or set an introductory visit with us.