Buy and Hold is Dead?

I'm sure everyone has heard in the media that buy and hold investing is dead. My definition of buy and hold would be defined as buying shares of GE today with plans of them financing my retirement. By that definition, I would not consider myself a buy and hold investor. Actually, by that definition I think it would be very difficult to find any buy and hold investors. I listed a few thoughts below which are not meant to be shots at anybody or any particular style of investing, but merely some of the paradoxes we all face as investors. Your thoughts and comments are welcome.

Can anyone properly define Buy and Hold? Is holding a mutual fund for 5 years that has a 300% yearly turnover buy and hold? If trading really really worked, why are countless hedge funds history? If all the brainiacs who ran these trading firms and funds ran their trading desks into the ground, does anyone truly believe that they have an edge in the markets while working a full time job? The smartest guys in the room were so smart that they factored into their models the idea that housing prices would never stop going up. Do the charts we create on stockcharts.com really give us an 'edge' over the millions upon millions of worldwide investors looking at the exact same signals? Does one truly believe that when they buy a stock because of a yahoo news headline, that the reason they are buying the stock isn't already factored into the price? If I bought CSCO at $80 will I ever make my money back? If I bought in October 2007, will I have a positive account balance in October 2010?

I'm not saying it is, but what if this is the beginning of a 5 year bull run? If I bought 'all in' today and held on for 5 years is buy and hold still dead? Is that buy and hold or is that just following a trend? Is buying the L Funds buy and hold if they are rebalanced daily? If the secret to buying stocks is buying in at a 'good price', then what if right now is a 'good price'. (I'm not saying it is or it isn't one way or the other.) If the average investor is now capable of using the MACD, PE, Slo Sto and Money Flow, do they still have the same effect as they did in the 80's? How does one know without the benefit of hindsight if they are truly getting into a particular equity at a good price if for every buyer there's a seller?

And really, does anyone just blindly buy and hold anymore? Not even athletes have loyalty to their teams anymore, how's somebody going to have loyalty to a stock that drops 30%? If Birch is true to his game, then even he sells stocks every now and then even though he does seem to do a heck of a lot more buying than selling.

Now that countless hedge funds and actively managed firms have been desecrated by their exotic, sexy, attractive funds and leverage, they are going to have to look elsewhere in search of clients. Where else better to look than main street investors who lost 40% in a few months in their nest egg, 'wasting their time in index funds'?

Nobody has any idea where the markets are going. If they did, then they wouldn't have to charge money for their timing systems and forecasts. Yes, I'm a sucker for alot of these market timers. I've tried a bunch of 'em, and continue to find myself giving new ones a shot. (By the way, almost every one has been just as clueless as all of us working stiffs on tsptalk, even though they consider themselves doing better than the market with a -25% return.) If their systems were really that good, why not just keep it to themselves, trade off it, make a fortune, and not have anyone factor their systems into the market? After this recent market crash and 10 year bear- asset allocation, portfolio theory, dollar cost averaging, indexing, and porfolio rebalancing are all 'dead' according to the guys in the media? If one miraculously had their money in G fund since the top in 10/07 and still has a 30+ year time horizon, there's still a loooonnnngggg season yet to be played. We live in such a short term world....

At the end of the day, the barons on the street make their money off of fees, not market timing or active fund management. If not for their fees, exotic pitches, and uninformed investors, they wouldn't survive. Buying high, selling low is here to stay.

 

[tsptalk]

B -

What do you consider the benchmark for someone being called a successful or unsuccessful market timer - beating the S&P500, a diversified account, an L-fund, etc.? Know what I mean?

 

[Bullitt]

Tom,

Good question. This is a subject of great debate amongst timers, traders and investors alike. Ken Fisher dedicated a couple hundred pages to his most recent book on the subject of 'Benchmarking' alone.

Simple answer: If you choose the S&P 500 as your benchmark, then you are only allowed to use stocks contained within the benchmark. In other words, if you choose to use any foreign funds in the EAFE Index and manage to beat the 500, for example, it's difficult to make the case that you beat the S&P 500 fair and square. It's kind of like saying you're in a fantasy baseball league NL only, and you decide to pick up AL players. Well, that's going beyond your universe of eligibilty to beat the opponent.

I have to believe that most benchmarks in today's world economy would have to be linked to the Global Stock Market, as you have indicated on the TSP tracker and also what I to use as my personal benchmark.

What is the benchmark for the L Funds? Another good question. L Funds are relatively new to the investing world and I used the T Rowe Price 2040 Fund TRRDX as an example on Yahoo. According to Yahoo Finance, the benchmark is the 'DJ Moderate Portfolio', so I would assume that would have to be the benchmark for the L2040 fund.

What is the benchmark to be considered a successful timer? In my opinion, and this is along the lines of Bennett Sedaca and Sy Harding (who by the way, are both in positive territory this year), a successful year whether market timing or holding or whatever your desire, is not only beating your benchmark, but beating it with a positive return. Example, Sy Harding's index is the DJIA according to his seasonal timing model since he uses the DIA ETF in his buy and sell signals. Mr. Harding seeks a positive return in excess of the benchmark in bull and bear markets, and frankly it's difficult to make a case that he hasn't beaten his benchmark over the past 20 years.

At the end of the day, a return of -20% is better than a benchmark return of -30%, but lets be honest here. That's kind of like saying one college football team is better than the other because one team lost to a common team by only 10 points while the other lost by 30 points. (Unless of course, you're the Texas Longhorns!)