May 20, 2009 at 6:00 am by Tom Lydon
The buy-and-hold strategy that has defined many an investors’ portfolio is being reevaluated as new data comes to light. As the notion is questioned more deeply, it could lead to a permanent shift in the way we invest in stocks and exchange traded funds (ETFs).
The recent market meltdown has shaken many investor’s faith in the long-revered buy-and-hold strategy. Devotees say that in the long-term, markets rise, and if you’re not in all the time, you risk missing gains, says A. Gary Schilling for Yahoo Finance.
One research firm recently found that if you removed the 10 best days for the Dow from 1900-2008, two-thirds of the gains were lost. However, if you subtracted the 10 worst days, the actual gain in the Dow tripled. Schilling says this is in line with his own research on the subject, as well.
He says he shuns the strategy because of the gambler’s paradox: the odds might be in your favor in the long run, but if you reach a bad streak, your money could be gone before you ever even approach the long run. Markets tend to fall a lot faster than they rise.
As a result, investors are taking on an active role, and becoming educated about markets. They are urged to actively trade shares and ETFs, rather than wait on the sidelines too long, or hang on far past the point where they should have let go. No matter what way the market is moving, a trend is always developing.
It is also wise to have a strategy along with watching market trends. This way, when an opportunity strikes, there will be a definite way to approach the market. By using a strategy such as the 200-day moving average, you can be sure to get out before your losses are large, and be able to keep emotions and guesswork out of the equation.
Tags: ETF 101, Trend Following
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