The Debate Between Buy and Hold vs Timing The Market

by Silicon Valley Blogger on 16 March 2010 8 comments
Photo: H-Gall

It's interesting to see that with the advent of computerized trading and value discount brokers, a new era of people investing with the idea of getting rich overnight has exploded, even as statistics show that most short term investors do not make money over the long term. This is in the heart of an interesting debate that rages on in financial circles: should we buy and hold on to our investments for the long term or is timing the market the way to go?

The buy and hold faction is quick to say that you'd be crazy to think you can beat the market over time, and that an eye on the long term is how you're going to make money via the stock market. But the other side — those market timers who've decided to cut their teeth on stock and options trading via their trusty TradeKing accounts — make the point that many investors who've held on to their investments are now lamenting that as a result of buy and hold, they'll need to be part of the work force for quite a bit longer than they expected.

A Closer Look At Buy And Hold

Let's take a closer look at buy and hold investing, shall we? So how about a quick game of one question Jeopardy: “the most famous buy and hold investor?” If you answered, “who is Warren Buffett?” then congratulations, you know your investment gurus! Warren Buffett is not only one of the most famous investors around, but also one of the most successful investors in history. Buffett is a market mover whose track record has been scrutinized by the investing public. When asked how long he intends to hold his chosen stocks, he gives a somewhat surprising reply, "we will hold stocks forever." And while this sounds somewhat extreme, he's also been extremely successful with employing a value investing stance over time.

The buy and hold proponents argue that predicting short term market moves is nearly impossible, and according to them, you can expect long term investing to give you much better results. But what about the recent stock market debacle that's decimated many a long term portfolio? While recent stock market numbers don’t look great, if you ask nearly anybody who has been involved in buy and hold investing, they will tell you that while their portfolio has decreased in value, it’s still up significantly from when they first opened their investment broker account, even after taking inflation into consideration. The key to this positive outcome lies in the assumption that you started investing a long time ago, when assets, in general, were quite cheap.

The World of Market Timing

The market timers and stock traders take the short term approach. These folks enjoy online stock trading, believing that they can make short term investments and predict those small day to day stock price changes well enough to make a decent profit over time. They use technical indicators and other economic data to make their educated predictions. When their trading dashboard numbers flash green, they quickly sell their positions to bag a profit. Their stance here is that by buying and selling quickly, they quickly lock in a profit and feel more in control of their financial destinies. Turn on any of the financial news networks and you'll find that many of the analysts here are short term traders who are trying to time the market. There are shows on these networks that sometimes spend an entire hour or more asking the question, “what will the market do tomorrow?”

Best Moves For The Average Investor

We can certainly appreciate the great arguments made on both sides, but I believe that for the average investor, it's best to stick with the long term investment approach. This would entail diversifying, developing a decent asset allocation that fits your goals and requirements, and owning mutual funds, index funds, or ETFs over a period of time. Over the long term, buy and hold investing coupled with a regular portfolio rebalancing strategy has proven to be a more successful approach for the retail investor. Stock market timing has tended to work out relatively better for institutional investors or traders with deep pockets because of their ability to hire professionals, obtain top resources, and use advanced strategies that often require experience and larger amounts of money to succeed. Now there are, of course, investors such as myself who employ both methods but with varying degrees of involvement: I have a core investment portfolio of mutual funds but on occasion, will dabble in some individual stock picking and market timing with my "mad money." What's important here is that regardless of which approach you take, you accept and are fully aware of the financial risks you are taking.

While I would stop short of offering a hard and fast position on this debate, I'll say this: any investor has heard that the stock market rewards patience. So take a look at your portfolio. If you have done well with your current strategy, then stick to what you've been doing; but if your results are flat or negative, perhaps you should try something new and consider beefing up your investment knowledge. After all, aren’t we all doing this for one reason? We all want to make money!

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Carlos Portocarrero's picture

Well put. It's always good to also put aside some "mad money" to go out and try to hit the homeruns just to satisfy the part of you that wants to roll the dice on a stock and try to make a lot of money.

But over the long haul, long-term buy-and-hold investing is the way to go.

The Writer's Coin  |  Follow me on Twitter

Guest's picture
Guest

Long term investing? Ten years now and I am still losing money!!!!!!

Guest's picture
Guest

I hate it when people lump buy-and-hold with timing. It's the difference between investing and trading.

I worked 15 years in the discount brokerage industry, 13 of it in management. I have never ever seen a single aggressive person make money over the long term trading. Not one. I've seen some people with relatively complicated and sophisticated strategies that involved a lot of trades that worked well but it wasn't really buying/selling the same stock.

One of the reasons I quit the industry was we kept on coming up with more sophisticated ways for investors to be "informed" about trades. The more info and especially the more blinking lights, the more they traded. The problem is, we all knew the more they traded the more they lost. So, it was a bit of a abattoir. The real money in the industry is transactions. So, we honestly don't make much money when someone was an investor and not a trader. The only other way we make money is when people are holding stocks we loan it out to someone else for their use in the form of loans.

Silicon Valley Blogger's picture

Long term timing seems to have worked for some people and in hindsight you'll see that.  Market timing -- the short term kind -- is trading.  But "not buying and holding" can also mean market timing that's done sporadically, mostly to respond to long term trends.  That isn't trading, but it's still timing.  And I think it makes sense to do this when your strategy/plan/economic circumstances call for it.

SVB @ The Digerati Life

Guest's picture
Christina

Makinga quick profit has worked for me.  I do not have the ability or the patience to participate in long term investing.  I completely agree with what you said at the end there, if you have found something that works for you, keep doing it!  Everyone is different, and some will profit more in long term investing, while others will profit more by watching day to day stock trades.  I prefer penny stocks, but I know I personally don't have the time to keep track of the stock market, which is why I subscribe to various newsletters that keep me the most up-to-date on the stock market.  One of my favorites is www.bullrally.com.  I've profitted a lot from following this newsletters advice.

Guest's picture
Nuno

Hi,

Having around 10% of your capital in 'mad money' is a good strategy because if the potential gains are usually so high that you can make a good profit out of this strategy. The remaining 90% should be well diversified ank kept in a long term 'buy and hold' strategy. ETFs are a good vehicle to achieve this strategy as they keep costs down and take advantage of long term trends.

Of course, the last 10 years are not a good reference of long term profitability...

Guest's picture

Look at where all of the major indices were in May/June of 1998. Add in the average inflation rate, plug in some regular buy and hold purchases, and you have a nice fat NET LOSS on almost all of those purchases. But regular contributions will mean that your overall balance has climbed, so you pat yourself on the back.

But the truth is that your balance is actually lower than if you had invested in CD's or treasuries or even a money market account.

This 12-year period may be a blip in the longer timeline, or it may be a plateau, or it may signal a longer decline, but I believe that the individual investor would be wise to rethink the 'conventional wisdom' regarding investing...

Guest's picture

since the conversation is about buy and hold vs trading, I would have to put myself in the middle. My definition of long term is when the current trend ends whether it is bullish or bearish. As a technician I am reasonably confident in deciding whether to be short or long and for how long. I probably use those same technical indicators that are referred to in the original post and they have performed very well over time. People who try to trade need to realize how different strategies work at different stages of the market. There is no one fool proof/catchall strategy. That is what most people look for and why most people fail. You are going to get conflicting information the decisions you make with that information is what makes you successful. You can follow my thoughts on my blog regarding the moves in the stock market on my blog: http://everyinvestor.blogspot.com/ . Good Luck everyone.