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Money Muse
Money Muse"Buy and Hold" Beats Market Timing
By Marko Tubic
Mar 28, 2002 -- "Buy low and sell high" may sound like an exciting way to invest. Just imagine it: You get in on a stock when its price is way down, you stay with it until it peaks, you sell your shares--and you make a big profit. There's just one problem with this picture: It's not realistic.Why is that? Because nobody--not even the most astute market expert--can consistently predict when a market has "peaked" or when it has reached its bottom. That's why the "buy low, sell high" investment strategy--also known as "market timing"--is so difficult to practice successfully.
You can find a better way to invest than consistently looking for market peaks and valleys. This alternative method is not glamorous. It's not exciting. It doesn't have a jazzy name.
This strategy is known as "buy and hold." If you're a buy-and-hold investor, you start out by picking high-quality stocks that meet your individual goals and your need for diversification. Then, you simply leave these stocks alone--sometimes for years. You pay no attention to short-term fluctuations. You pay no attention to market trends or "fads." You just stick with your stocks.
Of course, "buy and hold" doesn't mean "buy and forget." It's important to periodically review your stock holdings to determine if they still meet your changing investment needs. You'll also need to ascertain whether a stock's fundamentals have changed. Perhaps a new management team is taking the company in a direction you don't like. Or maybe the company belongs to an industry that is beginning to fade. In any case, you'll want to stay up to date on the stocks that you own, but you should make a change only if you have a long-term reason for doing so.
Want proof that "buy and hold" is more effective than market timing? According to an in-depth study by 1990 Nobel prize-winning economist William F. Sharpe, a market timer would have to be right at least 82 percent of the time to do as well as an investor who simply bought and held stocks. In another study, Kenneth Fischer, author of The Wall Street Waltz, estimates that an investor with an initial stake of $25,000 and the ability to perfectly time the market would earn a place on the Forbes list of "400 Richest Americans" after 21 years. The absence of such stock traders on the Forbes list is one proof that market timing can't be perfected.
Even if you're an active investor, do you really want to spend all that time and effort trying to figure out which way the market is going? By following a buy-and-hold strategy, you don't have to constantly check up on stock prices, and you'll save on commissions for frequent trading. In short, you look for quality, you buy quality, and you stay with quality.
So, the next time you read or hear anything about the "right time" to buy or sell, turn the page or turn down the volume. You'll be making a smart move.
Marko Tubic is with the Fremont Edward Jones Office @285-1777.
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