Bye-Bye Buy And Hold

The time-tested investment mantra has become so unpopular that even those who advocate the strategy don't refer to it by that name anymore.

May 2009

By Jeff Cox

The time-tested buy-and-hold investment mantra has become so unpopular that even those who advocate the strategy don't refer to it by that name anymore.

Now terms such as "buy and harvest" and "buy and trade" have replaced the old "buy and forget" philosophy once so popular among active stock market investors.

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The change reflects a spreading attitude that in an age of 24/7 financial news and information, which can mean tremendous volatility, it no longer makes sense to buy a stock and then check back on its performance five, seven or ten years later.

"The buy-and-hold and passive investing approach works really well in certain environments and not so well in other environments. The '80s and the '90s were a good time for buy-and-hold," says Matt Havens, partner with Global Vision Advisors in Hingham, Mass. "There's benefit now to being more active in your management style."

Investors who held tight during the contagion of the credit crisis saw their portfolios decimated by the market's multiple gyrations that generated losses of more than 50 percent for the major indexes. Even the most bullish of investors acknowledge it will take years before the market returns to its record levels of October 2007.

At the same time, those who were nimble enough to get in and out of positions at least gave themselves a chance to mitigate losses.

Emily Sanders, president of Sanders Financial Management in Atlanta, uses General Electric (CNBC.com's parent company) as an example of how its "buy- and-trade" strategy has worked.

At its worst, GE shares had lost 82 percent of their value, before investors became convinced the company could regain its footing and overcome losses sustained primarily at its GE Capital financing arm. Since the March low the stock has more than doubled in price.

"When something like GE presents trading opportunities due to severe gyrations, then it really calls into question the whole buy-and-hold-and-forget-about-it strategy," Sanders says. "You can't forget about anything. Nothing can be taken for granted, not even in the soundest companies."

At the same time, though, trying to pin the tail on a stock that is in free fall may not be that feasible for a typical retail investor. Most portfolio managers shudder at attempts to try to time the market as a whole and even particular stocks, choosing instead to find value levels or technical points - or sometimes a combination of both -- to determine when to buy and sell.

Meanwhile, the individual investor has to decide whether to follow the strategy employed during the massive bull markets of the late 20th century and avoid even looking at daily stock quotes, or confront today's reality of volatility sometimes four and five times higher than historical norms.

"The definition of buy-and-hold tends to be a little fuzzy," says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. "A lot of people think that means you buy something and do nothing for years on end. That's not a strategy we've ever implemented."

Yet Buckingham would include himself in the buy-and-hold camp -- sort of. Buckingham describes his firm's strategy as "buy and harvest," a term that he says entails a long-term investment horizon but with the flexibility to be "following the money."

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