Stocks: Is ‘buy and hold’ holding you back?
Many investors have "lost faith" in the buy-and-hold strategy. Where so many of them go wrong, however, is in thinking that buy-and-hold means “buy and forget about it.”
Financial advisors have long preached the virtues of buy-and-hold investing, said Jane Kim in The Wall Street Journal. Countless investors swear by the first-do-no-harm strategy of buying stock in consistently well-performing companies and holding on no matter what. But some have now “lost faith” in that strategy. “I just got tired of putting money away and losing it,” says Kenneth Kimmons, a 31-year-old who claims to have doubled his money since he began actively trading last fall. Experts warn that frequent trading not only results in higher fees and tax bills, but is “likely to make a bad situation even worse.” Still, many frustrated investors are willing to take that chance. “Nobody can time the market 100 percent correctly 100 percent of the time,” says Linda Smith, a 53-year-old who says her portfolio is up 5 percent since she began actively managing it last June. “However, that doesn’t mean you can’t get lucky now and then.”
Buy-and-hold has certainly been a “recipe for financial ruin” during the downturn, said David Serchuk in Forbes. But so has everything else. And now may be an ideal time to implement a buy-and-hold strategy, according Lloyd Khaner, the general partner of hedge fund Khaner Capital. Stocks in many great companies are trading for a pittance, and so offer plenty of long-term upsides. Where so many investors go wrong, however, is in thinking that buy-and-hold means “buy and forget about it.” Long-term investors still need to keep tabs on how the companies they own stock in are doing. Their concern, however, should not be “searching for trading tips,” but assessing the underlying fundamentals of the business.
Buy-and-hold “wisdom” tells us that stock rallies tend to happen without warning, said Kirk Shinkle in U.S. News & World Report. If you wait for a clear sign that a stock has made a comeback, you might miss out on some of its biggest gains. That holds true for the downside as well. “The long-term damage from a huge drop can often be more crippling than missing the run to the upside.” One option for staying protected is stop-loss orders. Such an order, which can be set for a day or for several months, automatically sells your shares if they fall by a certain percentage. How big a drop to wait for depends on your risk tolerance, but many analysts recommend erring on the low side. Though “a single-digit loss might hurt your pride, it won’t decimate your portfolio, and you’ll live to invest another day.”