Why Play the Fool's Game of Buy and Hold?

The conventional "wisdom" has been, for years, to buy stocks and hold them for the long term, i.e. until retirement. That advice has caused untold millions of American retirement accounts to evaporate. The latest incarnation of this advice has manifested itself in parroting "don't let this downturn spook you into selling" by many in the mainstream Media.

One recent example of this mantra born of specious reasoning appeared in a posting on MarketWatch yesterday:

"Don't get mad, get even: That sentiment could be a powerful motivator for shellacked shareholders who are reeling from the stock market's collapse.

Spooked investors may be tempted to sell into periodic rallies at this point, in an effort to at least recoup some losses. But that hopeful strategy is full of flaws. Selling into a rally is for traders, not investors. It shreds long-term plans and puts you on a hair-trigger defense."

How can anyone pretend to justify letting a portfolio of, say, $100,000 fall to a value of $60,000 just to maintain a "buy-and-hold" philosophy. They rationalize that to leave this market before seeing the last vestiges of value disappear would violate some hallowed principle of investing. Are you primarily interested in maintaining tradition at all costs, or in maintaining your retirement account?

They say, "You don't want to miss the market turnaround by being in cash when it happens." Utter poppycock!

Let's take that hypothetical $100,000 portfolio and suppose that, instead of hanging on out of sheer, stubborn, defiance of the market, we sold everything when it was down 15%, at $85,000. Now while other lemmings of absurd reasoning watch their holdings disappear, we are safe and can wait until the market rebounds to reinvest. We only have to see our $85,000 appreciate by 17.5% to get back to where we were, while those who held on until they were down to $60,000 have to get a whopping 67% appreciation just to get back to even.

Now, either prospect is disappointing. But the wise investor who rode out the downturn in cash, is years ahead of the one who stubbornly held on to his buy-and-hold philosophy without paying homage to reality.

The wise investor has other advantages over the false-adviser's puppets.

When he gets ready to redeploy his cash, he can put it to work in fresh, newly favored companies and industries. The buy-and-hold bulldog, on the other hand, is still in the same, potentially stale instruments he was in before. It is highly likely that new leadership will have emerged in the markets over the interim, and with cash in hand, our wise investor will be able to leverage that market trend.

The holder of cash, also can pick his moment to pull the trigger. He can wait until a confirmed and strong rally is underway before jumping back in. The unfortunate media disciple has no such choices on his horizon. His fortune will bob like flotsam on the waves, totally at the mercy of a fickle market.

Why play the fool's game? Why not use a little intelligence and logic to save your retirement? Whereas I am not advocating that you develop a trader's mentality and run from every slight downturn or chase every upturn, I do think it is important to not get married to your holdings just to satisfy some nefarious guru's antiquated and impotent theory.

Pick a tolerance level at which you wish to get into cash and then let that be a guide (not a dictate). Perhaps you can only tolerate a 7% loss as advocated by Investor Business Daily's CANSLIM approach. Perhaps you are OK with a 15% decline.

Regardless of your tolerance for risk, start thinking about maintaining value rather than maintaining tradition. Is it better to stick with the failed program or to prosper? The choice is obvious.

No enemy is worse than bad advice. -- Sophocles