Stocks did well today. The DJIA is up 10.88%, the S & P 500 10.79%, NASDAQ 9.53% and the Russell 2000 6.94%. Not bad for a day's work. The market-timers with their crystal balls must have made a killing. But of course there are no crystal balls and market timing doesn't work. What is needed in present conditions are not crystal balls but brass balls. If you succumbed to panic and bailed out of stocks last week, then you would have both realized and locked in your hitherto merely paper loss and also missed out on this upswing, which illustrates the simple point that one cannot make money in a market unless one is in it. Still, the bottom may be months and months in the future, and tomorrow may continue the sickening slide.
So is buy-and-hold dead and gone? Should you bail out and cut your losses? No, no, no, say these experts.
Here are some points to keep in mind:
1. Stocks are a long-term investment. The stock market is not the place for money you will need in the near term. And if you are a really old coot, say 80 years of age, stick to CDs and Treasuries.
2. Never put all your eggs in one basket. So trite, so true, and yet so often violated by otherwise intelligent people. (Remember the Enron folks?) Diversify! Across asset classes, across funds, across sectors, across investment styles, across all or most parameters.
3. Buy low and sell high. What an original thought! Bet you never heard that one before. Yet people do the opposite. Like a bunch of miserable lemmings, they buy high and sell low. Now is the time to buy, when the blood is running in the streets, and bargains are to be had. Now is the time to be a maverick and buck the crowd. "Whosoever would be a man must be a nonconformist." (Emerson) Stay the course and keep investing, paycheck by paycheck, especially now when stocks are cheap.
4. Divvy up your assets in accordance with your risk-tolerance. Don't mess with stocks at all if you cannot stand it, either emotionally or financially, to have your stock holdings be down 50% at some point. That's Wally Weitz's 50% rule. See the linked article.
Related Posts (on one page):
- Is Buy-and-Hold Dead and Gone?
- Warren Buffett on Buying Low
- Market Volatility: Panic or Stay the Course?
I might have said this before: Buy-and-hold is buy-and-die. Either your investment dies or you die before cashing out. The key to successful investment (whether stocks, bonds, real estate, lemonade) is not knowing when to buy but knowing when to sell.
Before buying you must set objective criteria for selling -- e.g., a targeted gain is reached, a stop-loss point is breached, the price declines a certain amount from a peak. This is critical, because all gains are nothing but paper until you sell, and you can't pay the bills with paper gains. The buy-and-hold strategy ignores this fundamental requirement of investment success. It inculcates a complacency about realizing gains until the unexpected happens, and then you panic.
And now a lot of people who have been relying upon buy-and-hold to deliver a comfortable retirement, because everything was hunky-dory during the bull market in stocks of the past 25 years, need to reckon with the serious prospect of a flat market of similar scale. (Keep in mind that after the major peaks of 1929 and 1966, it took more than two decades -- after accounting for inflation -- for new highs to be set again.)
A flat market in stocks doesn't preclude successful investment. But it does mean doing a lot more work, like stock-picking or at least analyzing mutual funds more carefully, none of which succeeds with a buy-and-hold approach. That only works during a decades-long bull run, which is probably over now.
That said, commonsense always rules. Like you say, invest in what you understand. Don't invest in what will give you an ulcer. Know your priorities, current income or long-term capital gains. Diversify, diversify, diversify. And I'll add this: If you must buy gold, buy GOLD -- i.e., bullion coins stuffed under the mattress -- because that is your hedge against Armageddon, not a bear market, when no one cares about a slip of paper you might have showing ownership of this or that when it comes to putting groceries on the table. And then only 5% of your portfolio, or if you are a gold bug 10% max.
My two cents,
Bill T
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