"Buy and hold" is one of
most heralded investment strategies promoted today. "Buy and hold" is also one of few investment methods where you are guaranteed to lose money 2 out of every 5 years...so why do it?Before expanding on questionable value of "buy and hold", it's probably best to take a deeper look into who's spending their millions of dollars of marketing money convincing you that "buy and hold" is best idea and why.
"Buy and Hold" Promoters
"Buy and hold" promoters vary but I'm going to single out mutual fund( http://www.stockrhythms.com/investing-in-mutual-funds.htm ) companies at this point since they seem to have deepest advertising pockets and are highly visible in their promotion of "buy and hold".
Mutual funds have a strong vested interest in having you buy into "buy and hold" mentality since their entire business model depends upon average investor keeping their money parked...through good times and bad.
Remember, mutual fund companies are earning a profit from your investment even while you are accepting losses!
So "buy and hold" is really greatest investment strategy available, it's just a matter of perspective. If you like that your mutual fund company profits while Bear Market ravages your account value, then "buy and hold" is for you!
So let's look at some data to see how this really works.
"Buy and Hold" Facts
Between 1929 and 2002, there have been 14 Bear Markets with an average of 39% slashed off value of stocks. During this 74 year period, it took an average of 3.5 years to return to breakeven!
Every time a "buy and hold" investor loses money in a down market, they lose invaluable time to reaching their financial goal. After eliminating overlapping Bear Markets, 41 years were spent suffering through a Bear Market or returning to break even.
In other words, "buy and hold" investors spend 2/3 of their time just to break even!
"Buy and Hold" Myths
My favorite myth or scare tactic used by investment gurus is; "buy and hold" investing is critical since you cannot afford to miss bull run when it hits. And they go on to cite what happens to those that miss "big days".
Ah...good point, what does happen? If you would have invested $100 in 1926 and just left it there until 1993, your investment would have climbed to $80,000. Conversely, if you had tried to time market and missed 30 best months, your investment would have only been worth $1,200.
"Buy and Hold" Does Work Better?
So I've just convinced you that "buy and hold" does work better right? But what would have happened if you used market timing and missed 30 best months and missed 30 worst months? Your investment would now be worth $120,000 or 50% more than simple "buy and hold".
