Should Humans Buy & Hold?

Feb 2, 2012 by

The “buy & hold” investing strategy long promoted by many professional money managers—most notably the esteemed John C. Bogle, founder and retired CEO of The Vanguard Group—is under attack. Some have said it’s “dead.” In particular, Mr. Kenneth Solow, author of Buy and Hold is Dead (Again), advocates “tactical asset allocation” and prescribes new rules for today’s investors:

  • Diversify and seek undervalued assets
  • Make forecasts about the investment markets
  • Do the hard work of learning about market valuation, market cycles and technical analysis
  • Use both qualitative and quantitative methods in making decisions about portfolio construction

I’ve read only summaries of Mr. Solow’s book, but I think his message reduces in part to 1) get smart about the market and have a well-informed opinion, then 2) act on it. Pending being educated by Mr. Solow, here’s what troubles me:

Maybe I’m in the minority, but this picture fits me quite nicely. As I’ve written before, one particularly cruel friend asks that I keep him informed of my investment moves so he can do the opposite, so consistent is my record of standing “buy low, sell high” on its head. I feel as if I make investment decisions on an intellectual basis. Given the results, either I’m a dolt or, in reality, human emotion is playing a large role in my judgements, as depicted above.

Would a disciplined understanding and implementation of “tactical asset allocation” help me to exile emotion from my investment decisions? What’s your view of and experience with buy & hold versus alternative strategies?

  • That’s kind of funny actually, a friend wanting to do the opposite:)

    You know, we’re all different here. I tend to get leery selling when things go down, and would rather buy when things are in a down cycle. It’s easy to get burned that way too, as sometimes investments don’t come back!

    Really, the way I see it, it’s key to keep in mind the time horizon for the need behind particular investment, and rebalance along the way accordingly. Best to keep emotion out of it as much as possible, but perhaps capitalize on others’ overemotional reactions. For example, two that I’ve posted about:

    1) when the credit rating downgrade came out, the market dropped. Before long, it came back. It was mainstream discussion then, but not now.
    2) when the tragic tsunami event hit Japan, the Nikkei plummeted. Weeks later, it recovered.

    • Money Counselor

      Great examples of where one could capitalize on an emotional (temporary) market reaction. What’s weird for me is I seem able to recognize these moments only historically! I envy your ability to do so when it matters–real time.

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