Bye-Bye Buy And Hold

By Jeff Cox

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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.

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"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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"The strategy is sound--buying undervalued stocks and selling overvalued stocks," he says. "Unfortunately, some people will confuse that with buy-and-forget as opposed to buy-and-continue-to-monitor."

"In this volatile environment, you can have financial stocks that appreciate 100 percent in a week," explains Buckingham. "To not try and take advantage of a move like that, you're not doing your job as an active manager."

But if "buy and harvest" with an active manager is still beyond one's appetite for risk, there's always the passive management strategy advocated by Charles Massimo of CJM Fiscal Management in Melville, N.J.

Even at CJM, though, "buy-and-hold is only part of the equation," admits Massimo.

Portfolio rebalancing that reflects investor priorities is the key, so the thinking goes. Maintaining a balanced and diverse investment outlook takes precedence over following market gyrations, so that goals are met and risk is minimized.

That means if bonds should do especially well during a particular period, that asset class naturally would take on greater weight in the portfolio. Subsequent rebalancing would shift the portfolio more towards equities, allowing investors to take profits from the growth in bonds while positioning for a gain in stocks -- "buy and hold and rebalance" as it were.

"What that accomplishes is the client never takes on more risk than they agreed upon," Massimo says. "The second thing it forces us to do is to sell high and buy low, because we're selling that asset class that performed best and rebalancing towards the asset class that performed worst."

At the core of such a philosophy is a belief that what goes up eventually comes down and vice versa.

"Nobody was rethinking anything when the market was going up, and now that markets are doing what they often do -- go down -- all of a sudden everything is out the window, and I think that's ridiculous," says Matthew Kaufler, equity analyst and portfolio manager at Federated Clover Capital Advisors in Rochester, N.Y. "You don't shoot your favorite dog just because he's old."

To the contrary, says Kaufler, who believes that a market pullback is time to add to positions of good companies that get beaten down -- "buy and hold and buy the dips," perhaps.

For some managers, though, what it all comes down to is finding the best way to make money without letting emotions interfere. So, if that is buy and hold or buy and harvest or buy and ask the computer, then so be it.

"Without a crystal ball, I think investors still need to have a more active approach, but with the caveat that it's going to be an approach that's systematic to the extent that your emotions do not factor into the decision of whether you buy and sell," says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn.

Tuttle relies on computer software to tell him what to do. "We take all of our creativity and all of our discretion and we design computer programs, and the computer programs tell us when to buy and when to sell," he says. "The queasier I am when the computer tells me to do something, that's usually when we're going to make the most money."

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