I’m a critic of Buy-and-Hold. I believe that investors MUST change their stock allocations in response to big valuation shifts to have any hope whatsoever of keeping their risk profile roughly constant. I don’t believe that is is possible that a Buy-and-Hold strategy could ever work in the long term.

That said, I believe that the Buy-and-Holders got a lot more right than they got wrong. Since the 2008 price crash it’s become fashionable to slam Buy-and-Hold for all sorts of reasons that I view as phony. It would be a terrible thing for investors to lose confidence in all of the many investing insights put forward by the Buy-and-Holders that really have stood up to scrutiny. This column will examine three criticisms that I view as unfounded and explain why I think you should hold to the Buy-and-Hold line on the points under question. [Also See: Buy-and-Hold a Defunct Equity Strategy?]

One phony (in my view!) argument that is often heard is that the crash shows that indexing doesn’t work, that investors need to learn how to pick stocks to be successful. No! No! A thousands times no!

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The Buy-and-Holders Believe in Indexing.

Investing

Because of the work I have done researching the effect of valuations on long-term returns, I have come to believe in indexing even more than most Buy-and-Holders. John Bogle revolutionized investing with his creation of the index fund in 1976. It is only in the past 36 years that it has become possible for most middle-class people to partake in the great returns generally offered by stocks in a truly simple way. I would never want to go back to pre-indexing days.

I see nothing wrong with stock picking for the small percentage of investors for which it is suited. Most of us are not in that group. For 80 percent of investors, indexing offers a way to invest in stocks that is much less risky.  Try to pick stocks without doing enough research and you are going to get killed. In the age of indexing, we no longer need to worry about investing research. Broad U.S. indexes have always provided a great long-term return.

We should rejoice that we live in a day when indexing is a viable investing option. Those who are taking advantage of the price crash to persuade average investors to return to stock picking are doing them a great disservice, in my assessment.

Short Term Timing

A second false criticism of the Buy-and-Holders is that they are wrong to disdain short-term timing. Whenever prices crash, there are people who claim that they knew what was coming and that, if you only had listened to them, you would have known when to lower your stock allocation. I am no Buy-and-Hold fanboy. Lots of Buy-and-Holders hate me for the criticism I have directed toward their favored investing strategy. I am here to tell you that it’s an exceedingly rare investor who can engage in effective short-term timing.

The research just doesn’t support the claims of those who say they know in advance where stock prices are headed. I am not 100 percent dogmatic on this point. It seems within the realm of possibility to me that there are a small number of people who really do possess this almost magical ability (I don’t personally believe this to be the case but I don’t feel that I can entirely rule out the possibility). However, even if that were the case, I cannot see how the typical investor could know in advance which expert to follow. There are always some people saying that it is a good time to buy and other people saying that it is a good time to sell!

Short-term timing (predicting where stock prices will be in six months or a year) is for losers. My Buy-and-Hold friends made a huge contribution when they came out strongly in opposition to the idea of trying to predict short-term price shifts. I think we all owe them a debt of gratitude for the (properly) relentless efforts they have put forward trying to warn us away from short-term timing.

Stocks Are Too Risky

A third criticism of Buy-and-Hold that I view as phony is the claim that stocks are just too darn risky to serve as the primary investing class of the middle-class investor. I hate this one! This one always catches on during secular bear markets. And in the long run it always causes millions to delay their financial dreams by a good number of years.

Here’s how it works. People go crazy for stocks in bull markets. They lose money that way because prices always crash once they get too high. Then they make it worse by learning the lesson that stocks can be dangerous only after prices have fallen hard. It really is bad to invest too heavily in stocks at times of high prices. But you compound the error if you then avoid stocks after they have returned to fair-value or low price levels.

Most of us are afraid of stocks. We don’t understand stock investing and we hate losing money. The behavioral finance guys and gals have done research showing that we hate losses more than we love gains. So it is an easy sell trying to persuade people to avoid stocks at the bottom of bear markets. We MUST avoid the temptation to give in to feelings of doom and gloom!

Stocks are the highest-return asset class. Most of us simply will not be able to finance a comfortable retirement without investing heavily in stocks for most of our investing lifetimes. A decision you make to avoid stocks at a time when stocks seem scary may seem prudent at the time you make it but may end up having cost you a lot of money when you someday look back to assess why you don’t have enough to retire at the age at which you had hoped to leave the daily grind behind you.

That felt good! Most of my favorite investing experts are in the Buy-and-Hold camp. I like being able to take their side every now and again!

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