What is the Alternative to Buy and Hold?

Many pundits have been claiming that the modern stock market has taught us that the buy and hold strategy is invalid. They advocate that the massive declines of 2008 and 2009 are evidence that buy and hold does not work. They allege that this strategy was sold to the American investor to line the pockets of Wall Street and has no validity. Should you be changing your investing strategy?

The general approach that has been advocated during the past decades has been to allocate a portion of your income to your retirement funds, invest in mutual funds and hold until retirement approaches. This results in dollar cost averaging. When the funds you are purchasing are at a low point, you will buy more of them and when they are at a high point you will buy less. This typically results in an average price that yields reasonable returns and doesn't expose you as much to volatility in the market.

Another important aspect of the usual strategy that is often overlooked is reallocation. In addition to helping tweak your returns, reallocation is also important in making sure your portfolio represents your phase in life. As you get closer and closer to retirement, you want to start removing risk from your portfolio and moving to safer investments. The absence of this component ruined many retirements recently. Investors, used to huge returns, were reluctant to start reducing their risk and left themselves vulnerable to the downturn. Had they practiced a reasonable strategy of rebalancing, they would not have been so exposed.

Ultimately the simple question you have to ask the pundits is: What is the alternative to buy and hold? Is the average investor supposed to become a speculator trying to ride the tides of bull and bear markets to maximize their returns? Many investors stopped contributing to their 401(k) accounts when the market turned down, waiting for a recovery to start investing. When recovery comes, this means you essentially missed out on the best time to buy stocks. Whether we’ve hit the ultimate low or not is irrelevant, if you keep buying the stocks you will participate in buying at the bottom.

If the suggestion is that investors were unwise to participate in the stock market and should get out, that suggestion may be valid. But if you believe the average investor should be in the stock market, it is unclear what the alternative to buy and hold is that they’re supposed to use. Before you change your investing strategy, you should consider the merits of what is being advocated. If you don't believe in the stock market, get out of it. But if you do, it can be very risky to try to beat the averages.