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The Myth Of Buy & Hold: Why Market Timing Matters

Can you time the market? Should you try? Research companies like DALBAR along with every single index fund manager on the planet swears that you can't and that you shouldn't even try to time the market. Many financial advisers instead suggest that you should adopt a strategy called "buy and hold."

Buy and hold means that you buy an investment and hold it, regardless of what it does. If it makes money, you hold onto the investment. If it loses money, you still hold onto the investment (with the expectation that the investment will eventually increase in value, thus allowing you to recoup your loss). You don't try to time your purchase. You don't try to time the market to make money. But, what is market timing? tells us that market timing is:

Attempting to predict future market directions, usually by examining recent price and volume data or economic data, and investing based on those predictions. also called timing the market.

In one sense, this makes sense. But in another, it doesn't. How can you really avoid timing the market? After all, what is it that every investor attempts to do (or ought to do) when they invest in the financial markets? They attempt to buy low and sell high, right? In other words, investors attempt to buy investments when they are "cheap" and sell them when they become "expensive." The difference is called profit and seems to be a universal goal for investors.

Well, how do you know when you're at a "low" and when you're at a "high?" You have to time your purchase. The alternative is to randomly buy into an investment and remain oblivious when selling it.

If you're really avoiding market timing, you'll not care whether you make or lose money. In fact, to be consistent, I think anti-market timers should just close their eyes and pick a date on the calender that they'll sell their holdings, regardless of how much money they've made or lost. Sound reckless? Sound risky? Sound anti-goal oriented? I think so too.

What I'm trying to get at is that if you buy a stock, bond, option contract, life insurance policy, annuity, precious metal or any other financial instrument with the intention of making money, then you're engaging in market timing on some level. Maybe you don't analyze recent price moves. Maybe you blindly buy into the financial markets over time trying to eliminate the risk of timing the market (financial professionals have a very fancy and technical name for this called "dollar-cost averaging").

I think this is wishful thinking, at least partially. At some point you'll want to sell your investments and spend the money. You'll either have something you want to buy, you'll have a vacation you'll want to go on or you'll want to retire. Whatever the reason, you're doing some type of market-timed buying and/or selling. By the way, I think it's natural and necessary to want to time the market if you have objective financial goals.

If you just lost money in the stock market, and it's cheaper to take out a loan to buy a car than it is to sell off your losing investments (and take a hit on them before you have a chance to recoup your losses) and pay cash for that same car, are you going to take a hit on your investments because you don't want to try to "time the market?" No, I don't think so. And you're especially not going to sell off a losing investment if you don't have to, and if it simultaneously works against a financial goal or goals you've set for yourself. At least, I don't think most people would see that as being a good idea.

When you buy or sell your investments, maybe you're not timing the market on purpose. But, you're doing it. And so is your adviser who preaches "buy and hold." At some point, you're going to stop holding. Then what? This is why I strongly suggest people become educated, at least on some level, about investing.

Pick up a good book on fundamental analysis or talk to an adviser who is willing to teach you how to value (and judge) what you're investing in. If you know what constitutes "cheap" and what constitutes "expensive" (i.e. if you understand how to value what you buy), then you can start to learn how to intelligently time the market (or, at least the investments you're investing in). In turn, you'll avoid pointless inner conflicts over whether you should hold an investment or sell it to accomplish some goal or set of goals you've previously set for yourself.

This entry was posted on March 27th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · 2 Comments · Investing

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2 Comments so far ↓

  • Anonymous

    I think you need to tighten up and expand on your argument here. I agree with the premise of the title, but the argument does not address the myth or the importance of timing.

    You essentially argue that reality dictates that one cannot buy and hold “forever”. While true, that alone does not make it a myth. Your argument is circular, i.e. because you have to buy and eventually sell, therefore, you defacto are timing the market…the implication is that there is only participation or non-participation in the market. This ignores the dimension of what to invest/divest within a world of multiple choices, once one decides to participate in the market.

    You really ought to have used the same to provide the definition of buy and hold that you are arguing against. Then,if you are arguing the myth aspect, I would expect a discussion on the assumptions that definition relies upon. Just off the top, there is the performance of stock in the last 10 years, investor behavior in a deep downturn (2008), recent research indicating some return premium on momentum…all good topics to explore and bring into question buy and hold as an effective investment strategy. Then, I would expect the discussion would turn to why market timing would provide results that would more than pay for the additional transaction costs and taxes…since, in reality, these are issues that investors face.

    • David C Lewis, RFC

      Everyone’s a critic. :)

      Thanks for the comment. Obviously, I cannot cover everything in a single post. I think you’re mistaken about the circular reasoning. It’s a tautology, which is a valid argument. I’m saying that buying and selling is market timing in the context of goal-directed investing. The reason you have to buy and sell isn’t because you are doing market timing, it’s because you have goal-directed action and I discuss this in the article. I think you confused “if you buy a stock” to mean “because you buy a stock”, but I made no causal connection there. Also, essentially, I am saying there is no such thing as “buy and hold” (that’s the myth–that it exists). Instead, you must buy and sell.

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