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Is "buy and hold" the smartest investing strategy?

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.