'Buy and Hold': As True Now as Ever

At times like this, old-fashioned advice such as ‘buy, hold, and don’t pay attention’ works extremely well. I’ve had several clients call over the past few weeks concerned about the day-to-day volatility in the stock and bond markets. I try to quickly remind everyone that asset allocation, diversification, and a solid financial plan are the ways to help achieve wealth--not cashing out a stock when it’s making money and trying to time getting back in after the price drops. That strategy, known as market timing, is a losing proposition over the long run and is better to avoid altogether. So what has the market in such a panic? I’ll give you a few different perspectives.

First, you have those technical guys who think market conditions such as tight credit and high oil prices have nothing to do with anything. They believe the market moves from a technical standpoint only and analyzing the state of the economy is a waste of time. Technical traders believe markets can be read--even predicted--based on chart patterns. Having a technical perspective probably makes sense to many when it seems like even when good news pervades the markets, stock prices find a way to decline by 4:00. Many people who analyze the market in this way expect to see a 10% ‘correction’ (dip) in stock prices at least once every five years. As of this week, we’ve seen the 10% correction and the markets bounced back strongly between Tuesday and Wednesday.

At a more logical level, we have the ‘fundamentalists’ who believe that incoming economic data is the greatest driver of stock and bond prices. For example, if home sales are doing poorly, consumers will likely spend less money in the future, resulting in lower sales for corporations and ultimately lower stock prices. This is certainly easier to digest than technical theory, even if the markets seems to ‘do their own thing’ every so often. In the current market, fundamental traders and advisors will blame lower stock prices on the weak U.S. dollar (relative to the Euro and Yen), high oil prices, slowing home sales and a tightened environment for borrowing.

At a personal level, I agree with much of the current fundamentalist sentiment--except for the weak U.S. dollar. My understanding is that a weak dollar will ultimately balance itself out in the stock market. If our goods are cheaper to purchase with Euros and Yen, then Europe and Asia will buy a lot more goods. We’ve already seen this in the real estate market, as more international buyers have been flocking to the U.S. than ever before.

We also saw a major investment this week in a U.S. financial company from Abu Dhabi. In this case, the purchase was in the form of petrodollars rather than Euros or Yen, but still exemplifies using foreign cash to buy into dollar-denominated goods. If you studied the business models of each company in the S&P 500, you’d learn that most of them do substantial business overseas. The currency discrepancy simply improves one aspect of their business (overseas sales) and weakens others (U.S. sales). Over time, it balances out.

So we return to the old adage ‘buy and hold.’ If anything, lower stock and bond prices present an opportunity to purchase more securities at lower prices. Once oil prices return to historical levels, the dollar gains some traction, and people stop buying homes which they can’t afford, the attention will shift back to corporate profits, where things seem to be business as usual. And as for a recession... no I don't think its on the horizon. Quite the contrary.

Comments

[Ka-Ching]

I am a "technical guy"! Have you noticed why CNBC has not invited the "technical guys"?. They did not want to broadcast the "crash" of lower stock etc. prices. Charts do not lie! I have created "wealth" with charts. My accounts 94%+ in cash. LOL if you do not use the "technical" chart patterns.

[jcrash]

They have chartists on CNBC. I'd say they are more doom and gloom on CNBC than is warranted.

94% in cash after Friday when some techs had a 10% intraday move? ROFLMAO! Hope you like those 4% yearly returns, while the traders can have days that good.

[flash54]

excellent

[Ka-Ching]

Take a good look at stocktiming.com Free & if you are a chartist it is free. Excellent

[jcrash]

As true as ever? I'd agree, assuming you mean it is never true.

Not taking advantage of stocks that can swing 10% intraday is silly. If you want to sit in a good investment and watch it go up and down every day, good for you, but I'd rather find a good investment and sell into strength knowing that with the Vix over 20 it will be back down for me to rebuy or even go short on the way back down.

[NoFate]

I think the author misses the point. The overall economy trumps company news and this trumps technicals. Besides, most true technical traders are day trades ...in and out, short and long, as their charts direct them. Comparing this to the average buy and hold investor is like comparing a Major League baseball player to a Little League player ...apples and oranges.

I will add also, that Dr. Hussman has very simplistic model he outlines that does FAR better than buy and hold over the long run:

www.hussman.net/wmc/wm...

Finally, buy and hold is not what hedge funds or mutual funds do ...so do as I say, but not as I do! It's true that most investors don't have the skill to do better than the major indices, but buy and hold has been the mantra mainly so that the big players have some level of support and everyone doesn't just go to cash when a bear market shows up. It's a con people. If you really believe this then stop reading immediately and just dollar cost average into the major indexes from now on.