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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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  • Is "buy and hold" the smartest investing strategy? 6 comments
    Mar 1, 2012 11:28 AM

    The traditional "buy-and-hold" approach to investing is rapidly falling out of favor. To a degree, the Internet combined with dirt-cheap trading fees is to blame, but something else appears to be going on, too. Increased volatility in the past decade certainly has contributed to the rise of short-term trading and the decline in long-term investing.

    The growing popularity of active trading (day trading and swing trading) is also part of this dramatic change. At the height of holding periods (between 1940 and 1945), the average time securities were held ranged as high as 10 years. This has steadily declined over the years. By 1975-80, the period was cut in half to six years or less. And then the average period declined dramatically. Currently, the average holding period is under one year. (SG Global Strategy Research, cited by Henry Blodget, You're An Investor? How Quaint, in, August 8, 2009)

    Does this mean that approaches to investing and trading have changed due to outside influences, or is the perfection different today? Many financial advisers have also abandoned the old-style buy-and-hold strategy and, in fact, value investing itself, and today seem to advocate not only short-term holds, but broader mixes of assets. These include ETFs over mutual funds, bond and commodity funds or index pools, and a range of stock swing trades based in daily changes rather than monthly or annual changes. Advisers also seek strategies responsive to ever-changing levels of volatility, with little interest in finding long-term buy-and-hold candidates.

    It makes a degree of sense. About 20 to 25 years ago, the most popular blue chip investments included companies like GM and Kodak, and there were no Internet companies at all; they simply did not exist. Today, the idea of believing in a long-term hold of two to three decades out is troubling because the world has changed and continues to accelerate. This means that many products (like guzzler cars and film-based cameras) are likely to become obsolete in the near future. A popular modern strategy is to keep a majority of funds in short-term debt securities, cash or precious metals (gold and silver, most often). Also popular in this new world of trading are leveraged ETFs, both bullish and bearish.

    This new approach does not eliminate market risk. In fact, it often increases short-term risk while adding to tax liabilities and trading fees. There are no magic fixes to deal with volatility, but the trend away from buy-and-hold and toward extremely short-term trades tells the whole story. To get a handle on risk-reducing ideas in a quick and easy source, check low-risk strategies

    More traders and advisers today shun holds even of six to 12 months, and prefer daily monitoring and trading as a means for riding volatility. Do these active traders out-perform the buy-and-hold approach? This depends on the choices made and the level of market risk in the specific products chosen, not to mention timing. An active trader using commodity funds or metals-based pools like GLD and SLV are likely to ride bullish waves as well as crash quickly in bearish retracements. In comparison, limiting activity to other sectors can produce a variety of outcomes. Now that average holding periods are under one year, it will be matter of time before anyone will know whether active trading out-performs buy-and-hold.

    Now more than ever before, it's crucial to keep up to date on news and information in the market. The array of sources makes it difficult to know where to look for information. To make this quick and easy, rely on one real-time source. Check newsfeed to find out more.

    Michael C. Thomsett is an instructor with the New York Institute of Finance. He teaches three options courses: "Swing Trading with Options," "The Amazing World of Options," and "Synthetic Options Strategies." He is also an investing and options author and has also written for FT Press' Agile Investor Series, which can be viewed on Thomsett's latest FT Press book is Trading with Candlesticks.
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  • Rookie IRA Investor
    , contributor
    Comments (2886) | Send Message
    Buy and hold works well in an era of gradually increasing prosperity, mild inflation, and stable dividend paying companies with expanding markets.


    However we are now in an era when we may well be about to see generations of declining living standards.


    People actually DO buy and hold in mutual funds embedded in tax assisted pension plans of various types, however the managers of the funds trade in and out of stocks in a mostly futile attempt to beat the market. On average they are beaten by the market, but every so often they get lucky for a season or two before reverting to the mean.


    My father used to say the best way to pick a mutual fund is to choose the one with the worst results for the last two years, because surely it couldn't get any worse.


    Even professionally managed pension funds are often able to do no better than break even over a period of several years and are having difficulty meeting their obligations. The Florida state employee pension fund threw 2% of the fund into Enron only weeks before the company went bankrupt and was revealed to be a complete fraud.


    So, when even professionals make the most dreadful errors, every amateur investor is looking for an edge, a way to get some kind of income and capital gains out of the stock market. It is a dog-eat-dog world and the buy-and-hold investor is the a dead dog.


    Also consider that although a judicious buy-and-hold strategy MIGHT be good for some investors if the period is long enough, it doesn't make much in the way of trading fees for Wall St., so there is a natural tendency for the business of brokerage to facilitate frequent trading.


    For a while it looked as if a lot of buy-and-hold investors had found the perfect answer--just give a million dollars to Madoff and then forget about it. Some were not so foolish, though. Many multimillionaire golfer bypassed Madoff and invested with Allan Stanford instead and then found themselves having to take Geritol to prolong their careers a few more years to get out of the financial bunker he had trapped them in.


    However, as John Maynard Keynes once said: "In the end we are all dead". If you are on the deck of the Titanic, do you get in line to wait for a place in the lifeboat, fight for a place, try to bribe your way into a place, jump into the icy water, go down with the ship, or what?


    I would not mind buying and holding, but what would I buy and what would I hold?


    There are some massively profitable companies with a huge moats, but no guarantee that the alligators in the moat won't turn on their keepers if they get a chance.


    Buffet is a buy-and-hold investor, but he has the considerable advantage over the small investor that he deals in companies, not in stocks. You could buy and hold his Berkshire stock, but really it is just another kind of better managed mutual fund.
    4 Jun 2011, 12:25 PM Reply Like
  • Thomsett
    , contributor
    Comments (74) | Send Message
    Author’s reply » You asked a great question: "...What would I buy and hold?" I have been struggling with this question for years, just like everyone else and I agree that mutual fund management's history has been dismal. For those who like the buy-and-hold concept, the answer is to pick stocks that excel in several fundamental ways. These criteria should include at the very least:


    1. Buy shares of dividend achievers, those companies that have increased dividends every year for 10 years or more.


    2. Limit the selection to stocks with very small or declining debt ratio, never buy a company whose debt ratio is rising.


    3. Don't buy companies with average P/E over 25. The best way to analyze P/E is annual ranges over many years, not today's P/E in isolation.


    4. Last but not least, seek companies reporting profits. This should include rising revenue and net profit each year and steady or rising net return. A danger sign: revenues are rising but the net return is declining.
    5 Jun 2011, 07:48 PM Reply Like
  • Thomsett
    , contributor
    Comments (74) | Send Message
    Author’s reply » buy and hold - possibly outdated, but also sensible for many.
    1 Mar 2012, 12:11 PM Reply Like
  • Sum02006
    , contributor
    Comments (462) | Send Message
    Not sure if you're aware, but this article was recently cited in an opinion from the nation's leading business court--the Delaware Court of Chancery. See Congratuations!


    I thought your article was very interesting and thought-provoking. I believe that value investing, with a holding period of several years--if not decades--is the way to go. It does require an investor to avoid certain types of companies. But investing in the "steady eddies" that have healthy company economics and robust dividend growth histories is a great way to acquire wealth over the long term.
    4 Nov 2013, 10:42 AM Reply Like
  • Thomsett
    , contributor
    Comments (74) | Send Message
    Author’s reply » Thanks for letting me know. I was not aware of the citation. Also, thank you for your comments; the article was intended to point out a changing trend in the market that is perhaps more troubling than positive, but that remains to be seen. Again, thanks for letting me know about this. - Michael
    5 Nov 2013, 08:33 AM Reply Like
  • Thomsett
    , contributor
    Comments (74) | Send Message
    Author’s reply »
    5 Nov 2013, 08:34 AM Reply Like
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