For me, the last four years of economic turmoil have exposed many personal finance rules of thumb as rules of dumb. One of those may be the entrenched principal of “buy and hold” as a retirement investment strategy.
Robert Laura, a personal finance contributor at Forbes, adds to the “buy and hold” doesn’t work argument with his own data. First, he notes that the equity markets have recently surrendered almost all of the gains they achieved earlier in 2012. There is more than anecdotal evidence against buy and hold, however.
Laura studied trading range data going back to 1990. He discovered that the Dow reverted back to within 1% of its year opening value at least once every year. In some years (including 2011), this happened three or four times during the year.
Buy and hold investors gain nothing from these annual market gyrations. The reason is that they don’t buy low (during the annual dips) then sell high (during the annual peaks.) That would be market timing which for 99% of us doesn’t work either. How are we to know when these dips and peaks occur?
So what should investors do? Fundamentally, Laura believes that we should be more active in managing our investments. This includes having a specific reason for owning each of our different retirement assets. We should also set buy and sell targets for everything. This would allow us to capture gains when appropriate and minimize losses. It is different from market timing because we are not trying to guess which direction the markets will move.
This is what I am trying to do with our investments. This is not easy because it’s not buy and hold. But it must be done. The days of the couch potato investor may be gone. We own what we own so that we will be able to generate retirement income. In the interim, we want to continue our cash contributions to our retirement accounts while preserving capital. If during volatile times the only reason that our retirement accounts increase in value is because we are making contributions, so be it.
Are you a “buy and hold” retirement investor? If so, you should read the article by Laura.