When it comes to investing, there two distinctive strategies. The first is the buy and hold approach. The second is timing the market. Simply put, buy and hold investors keep buying (stocks, mutual funds, ETFS …) no matter what is happening to the market and hold those investments regardless of market conditions. This is typically done through a strategy called dollar cost averaging (DCA). Market timers seek to take money out when the market is weak and buy more when buying is good. Ultimately, you need to be sure that the investing plan is personalized to your preferences.
These days there are a lot of varying opinions about what the market is going to do. Has the bull been released to run free, or is the bear lurking behind a hidden door? Fortunately, if you are a buy and hold investor you do not need to worry about those factors as long as you have a long term timeframe (5-10 years). I concluded a long time ago that I’m not smart enough to time the market.
The Problem with Buy and Hold Investing – You May Look Like an Idiot
I spent the end of 2008 and the first few months of 2009 feeling like an idiot. Ever since I bought my very first mutual fund about 15 years ago I have been a buy and hold investor. I’ll be honest, the economic downturn made me doubt and second guess my myself. The situation was actually intensified because in April of 2008 I cashed in all my non-retirement related investments so that I could move them to another brokerage. I held that check in my hand and then turned around and threw it right back into the market. My losses were just about in line with everyone else around 40%.
I started with such a strong buy and hold mentality and I was such a strong believer in that every time the market went down I threw a little more money into the market. It would only take a few weeks before I would feel like even more of an idiot. I thought everyone else had pulled out of the market while my losses were growing minute by minute.
Three Advantages of Buy and Hold Investing
The Buy and Hold Approach Lets You Look Like a Genius
Though I felt like an idiot in the middle of the mess, I feel quite good now. I have not lost a single dollar in the 2008 – early 2009 market woes. I now feel a sense of redemption. Perhaps I did make some wise choices. Either way, there have been some blessings from the financial weakness.
At this very moment, the market timer has the weight of the world on his shoulders. He struggled to know if it the market is destined to go up or down. They are forced to decide if they should get in or stay out. The agony increases. The buy and hold investor, on the other hand, has made his choice and moves on. Sometimes this is an extremely lucrative decision as the market has now offered around 55% returns since its low point this year.
The Buy and Hold Approach Protects Your Investments From Their Greatest Enemy – You
While investing has many enemies, none is more formidable than the enemy within. While there are many lessons to be learned from investing, you should not start investing until you have at least a fundamental investing knowledge. Without some fundamental knowledge you will be setting yourself up for a fall. In general, the less sophisticated a plan sounds and the more boring it appears to be, the more likely you are to succeed. Your emotions will take you on a roller coaster, but you need to continue to do what is right regardless of how you feel.
The Buy and Hold Approach Offers the Flexibility to Focus on Other Life Events
I sure hope the sum of your life includes more than the movements of the market. Far too many people can tell you what the DJIA did today, but cannot tell you what their kids did at school. Why is it that people have time to watch the market, but not time for leisure? The buy and hold approach lets you spend your life energy in line with your values.
As you look ahead to your investing plans for 2010, you should seriously consider the many advantages of being and buy and hold investor.
Are you a fan of the buy and hold approach or market timing?
Post by Craig Ford
Last Edited: 25th October 2009