Buy And Hold A Flawed Strategy

A late-day rally helped the indices close near their highs of the day. The Dow finished with a gain of 277 points or 3.4% after losing nearly 700 points yesterday. Over the last 7 sessions the Dow is still up 860 points. The S&P 500 rallied 4% today and recouped 32 of the 80 points it lost yesterday. The NASDAQ, which fell an amazing 9% yesterday, bounced 3.7% or 51 points today. Oil fell to a new multi-year low and gold gained $5/ounce.

It was not surprising to see the market sell-off on Monday after the biggest five-day rally in 75 years heading into the holiday weekend. However, the magnitude of the move was definitely a surprise. I had considered taking a short position through short ETFs on Friday, but at the end of the day I did not want the risk of holding a short position over the weekend. In hindsight it would have been a great move to initiate a short/hedge on the shortened trading day on Friday, but it was not done. After yesterday’s debacle, a bounce back today was likely, but not a sure thing. But after a strong close to today’s session I am on the fence about buying into short ETFs as a hedge, however if the market weakens late tomorrow morning it may be our next move. Only time will tell at this point, I am open to anything.

THE END OF BUY AND HOLD STRATEGY?

After a very difficult 2008 that has brought the S&P 500 back to the same levels they were at in 1997 it is not surprising investors are ready to give up on the buy and hold investment strategy.

There have been more than a few unsatisfied investors venting to me this year that their mutual funds are at the same level today as they were a decade earlier, if not worse. This does not surprise me as most investors will simply invest in broad-based investments such as index funds or poorly managed mutual funds that consistently lag the market performance. Even though the indices have done virtually nothing over the last decade, there are plenty of stocks that experienced large gains. Exxon Mobil (XOM) is up nearly 200% since 1997. Wal-Mart (WMT) is up nearly 300%. Even a “boring” stock like Procter & Gamble (PG) is up 100%. Or you could have had even bigger gains with utility stock Exelon (EXC), up 450%. Even FedEx (FDX), which often tracks the economy, gained 150%. I have not even delved into the small and mid-cap stocks with gains over 1000%. The point in am trying to make is that there will be plenty of opportunities for investors to make money even during times of consolidation for the major indices. The key is asset allocation and stock/ETF selection.

Check out the chart below of the Dow going back to 1960. I want you to look at it and think about my remarks and I will give my full explanation tomorrow.

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Comment by Stephan

2008-12-03 17:18:01

With all due respect, Buy and Hold has never been a Strategy; Even a flawed one.
Buy and Hold is the Absence of a strategy.
It seems that it is not obvious to everybody that any investor should have an idea of the down limit at which they are prepared to cut losses in order to preserve your gains.

Exit Strategies exist but are rarely employed by the common investor, either by lack of knowledge or fear of failure. Unfortunately, failure we have.

Knowing that it takes a 333% increase to compensate a 70% loss, would you be more upset to sell a stock and see it gain 20% or lose 20%?
We could ask the stock owners of a Lehman Bros and many others, they have experienced a Buy and Die. Can we call that a strategy too?

As mentioned previously, we have tools at our disposition to prevent such losses.
I respectfully invite you to visit SmartStops.net and see by yourself

Best regards and happy holidays

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