Buy and MONITOR ACTIVELY

Don't Believe in Buy and Hold

The buy and hold devotees say you can't time the market, and if you aren't in all the time, you risk missing much of the gain. A Spanish research firm found that if you removed the 10 best days for the Dow Jones industrial average in the 1900-2008 years, two-thirds of the cumulative gains were lost. But if you missed the 10 worst days, it found, the actual gain on the Dow tripled. These results are in line with our earlier research and reflect the fact that stocks fall a lot faster than they rise.

We eschew the buy and hold strategy because of what's known in classical statistics as the gambler's ruin paradox. The odds may be in your favor in the long run--in this case, your stocks may provide great returns over, say, 10 years. But if you hit a streak of bad luck, your capital may be exhausted before that long run arrives.

Or more likely, a severe bear market will scare you out at the bottom. Many investors bail out then and don't reenter until the next bull market is well advanced. This explains why the returns of mutual fund investors lag well behind the performance of the funds in which they invest. A widespread retreat is what makes a good bottom, as we've noted in many past Insights. All those who can be shaken out are. They've reached the puke point at which they regurgitate their last equities and swear to never ingest any more.