Comment by James Scott on April 28, 2009 at 1:48pm

This is something I have been thinking about as well. The main reason I enjoy the buy and hold investing philosophy is because it is simple for average investors. I don't want to research individual stocks, data sheets, news reports, leadership changes, and daily movements of stock prices. I like setting aside money each month and putting it into my investment fund.

Of course, this was all good while the stock market continued to rise. Research showed that people with a mutual or index fund buy and hold strategy often performed as well or better compared to people who bought and sold individual stocks.

I now wonder if buy and hold investing is really dead? For baby boomers, it really was a bummer to buy and hold so long only to see the value of their portfolios crash just when they needed the money for retirement. However, many people saw this crash as a buying opportunity. For younger investors who buy and hold stocks now, the strategy might prove highly effective over the next few decades.

I guess there are two questions.

The first is between a passive and active investing philosophy. I fully support the passive investing philosophy because I (and most average investors) don't want to be a full time stock trader. We have lives and jobs and interests that don't allow us to be full time stock traders. In addition, as I stated before, research shows that while some active traders can win big by picking the right stock at the right time, most active traders perform worse than the passive traders who just invest in mutual and index funds each month. I don't want to pay a ton of taxes and fees as an active trader when I can pay a professional to do it for me often at a less than 1% expense ratio.

The second question is will stocks be a good investment over time. If stocks will not perform well, then I don't want to be a passive or an active trader. Sure, active traders still might be able to hit a few home runs in an overall down market while passive investors will certainly see losses, but this is not a ringing endorsement of being an active trader. It is an endorsement to get out of the market. Being an active trader during a good market is hard enough and often not worth it. If the experts are saying that you need to be a savy (and lucky) active trader in order to make money in the current market, then we know this is not a ripe situation for stock investing profits.

Where will the stock market go over the next 5, 10, 20 years? This is hard to predict. The track record has shown the stock market on a general upward trend with the usual peaks and valleys. We are in a huge valley right now, but this doesn't mean the stock market will continue to be in this range. The American economy expanded quickly based on cheap access to oil which is no longer as cheap. Many of the companies in the stock market are now companies with a global reach where growth is widely available. More money seems to be going into the stock market as average investors get better digital tools to research and invest in the markets. There are a ton of arguments that could be made for and against the idea that the stock market will continue on an upward trend. It is an individual choice we all need to make as we consider as much information as possible.

For me personally, I expect the stock market to increase over the next few decades. Global economic growth increased every year except for last year. One blip in this global growth trend is not enough for me to get overly pessimistic. Hopefully new regulations will reign in some of the wild speculation and risky lending that caused a big portion of this financial crisis.

I see the current market as a buying opportunity. I put a large amount of money into the stock market though mutual funds when it was around 7,000. Hopefully we will see a long slow rise out of this valley. I continue to invest every month to take advantage of the current valley. I know there are some people who look at the history of the great depression and point to a similar rise out of the valley before the market fell off the cliff. I know there are still problems out there, but I have confidence that they are being handled differently than they were in the 1930's. I don't think another great depression is still a possibility even though we came pretty close.

I will continue with my buy and hold strategy, but I reserve the right to make decisions based on the economics of the moment. In times like now, I will generally increase my investing pace to take advantage of the low market prices. If I see the market get too hot and financial services companies getting too far extended, I will consider taking money out of the market or stop the buying of new stocks. I will be much more cautious with my investments as I get closer to retirement.

While I still believe in a buy and hold strategy, I need to point out that I also believe in a diverse approach to investing. This is why I favor low cost mutual and index funds to spread out my risk in the stock market. In addition to diversifying my stock investments, I also diversify my overall investment approach. I'm not a big fam of investing in real estate, but I do enjoy investing in starting my own businesses. Most people who are really wealthy are either stock investors or business entrepreneurs. My basic business investing strategy is to try to hit a few home runs without investing too much money. I boot strap my own start-ups so my monthly business expenses are very low while my potential for profits are much higher. Starting a business is not for everyone, but it is something I enjoy.

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