Is Buy And Hold Bad Advice?
Originally posted on 11/16/08
Someone told me the other day that NBC’s Jim Cramer (who I’m not a big fan of) said on his show, “You haven’t made any money in ten years, so buy and hold must come into question“. Everyone has always been told to invest for “the long-term” and to buy and hold onto your stocks, and this strategy still holds true today. Sure, because of the recent crash in stock prices, many portfolios are not much above where the were ten years ago, but who’s to say they won’t triple in the next 10 years?
Timing the market is one of the most difficult investing tasks there is. In fact, I don’t know of anyone that has been able to consistently time the market over a long run. What ends up happening for most investors is that they will try to time the market by moving their money from lagging funds into the rapidly growing sectors at exactly the wrong time. It turns into a buy high and sell low strategy.
In a market crash, like we are experiencing now, values tend to get depressed to artificially low levels because of fear and uncertainty. The reality is that as of late October (which includes our current crises), the S&P 500 has displayed an average annual return of 17.57%! Who wouldn’t be happy with that sort of return?
Some are even pointing to the declining value of the Warren Buffet’s company as evidence that value investing doesn’t work. That is nonsense. Actually, Buffet is buying right now to take advantage of stocks that he considers to be undervalued due to the recent decline in prices.
The bottom line is that there are bargains all over the place right now. The U.S. economy is in a crisis, nobody denies that, but we’ve been here before and the markets are amazingly resilient. If you don’t need to cash out in the next year or two, don’t given in to the fears in the market. Take a good look at your portfolio and see how you feel about the long term prospects of the companies you own. It is certainly fine to sell out of a stock like GM, if you are concerned about their existence, but don’t sell your Coke stock because it’s been beaten down.
Things will turn around, in the mean time try to find a few of those bargain stocks to buy up while they are down. You’ll be glad you did.