Buy and Hold - an antiquated theory?

Well, we finally did it - we've sold off 50% from the S&P highs, held just 9 months ago and there is still widespread fear all around that lower is the next stop..."ZERO" is the new mantra of the many hundreds of thousands that have seen their investments and retirement savings cut off at the waist. The joke around the water cooler is not how your 401k is doing, but whether you've liquidated your "201k."

Sadly, this is not a joke - many retirees are in a shell-shocked state, seeing their lifetime of savings halved in the blink of an eye. Unfortunately, these retirees were given incredibly inappropriate financial advice or believed (as did many of us) that the party on Wall Street would never end and they wanted their cake too. Those close to retirement should have been primarily in bonds over 10 years ago and out of the market completely over 5 years ago. Although this is a recommended asset allocation which serves to protect you from a nasty downturn, in fact, because Treasuries outperformed equities over the last 10 years, this asset allocation would have been better for all of us, not just retirees.

So what's next? Do we all go an cower in the corner til the sky falls and then rebuild? Should we all be going to cash - selling our holdings in investment and retirement accounts, here at S&P 700?

This is what many so-called experts will tell you - that Buy and Hold has ended and been a laughable strategy invented in the 80's as the boom market took off...that no one in their right mind holds a stock forever.

Well, they are right...partially. No one holds a stock forever - no one should. Companies have their own life cycle, and while they are growing or even in saturation stage (some companies stay at the saturation stage for a long time - see MSFT), they are absolutely worth owning. When business starts going south, then it is probably time to sell.

But how many of our 401ks are in individual stocks? How many of our investments are? The answer here is pretty clear - almost none. By and large, most investors, even today, continue to invest in mutual funds, which certainly explains how this multi-trillion dollars industry thrives, even today.

Mutual funds are managed holdings of a diverse basket of stocks. The key word here is "managed." Mutual fund managers buy and sell all the time ... so that WE DON'T HAVE TO. If we buy and hold, we continue to allow mutual fund managers to continue their good work, which is identify and buying great companies, while selling underperforming ones.

It is amazing to me that the opponents of "buy-and-hold" are attached to such a limited view of how stocks are bought and sold...as most of them are "experts," they clearly ignore the fact that a huge majority of investors DO NOT hold individual stocks and instead hold "managed" mutual funds.