Buy and Hold vs. Market Timing

08/05/2011 2:30 pm EST


Mark Hulbert

Senior Columnist, MarketWatch

The answer is simple, according to Mark Hulbert of the Hulbert Financial Digest: buy and hold, always. But almost no one can really stomach both the highs and the lows. That’s why Hulbert suggests finding a strategy you can follow unwaveringly, in this exclusive interview with

It seems that many investors who were burned in the market are still very fearful of buy and hold, and increasingly have been moving towards trading. What do you think about that?

Well, I take a rather cynical view of this swing back and forth between the extremes of buy and hold at one end and market trading or market timing at the other.

It turns out that if you look at it over a market cycle, the popularity of each of those two goes in very predictable patterns. It turns out that at the top of a bull market—almost by definition really, if you think about it—buy and hold is most popular, and market timing is at its least popular. Just the reverse is the case at the bottom of a bear market.

So for example, back in October 2007, lots of the market timers that I track ended up saying no, no, no, they now believe in buy and hold, and I was cynical. I said to them—when some of them announced that at Money Shows, or at other events that I would see them at—and they’d say well, they’re now believers of buy and hold, and I said, talk to me again at the bottom of the next bear market.

And there were a lot of the people who said that they were going to believe in buy and hold, and follow it through thick and thin, who at the bottom of the bear market in March 2009, found it intolerable—they just couldn’t hold on any longer. They said, "Well, we had no imagination of a drop of the magnitude we saw," and they threw in the towel.

Ironically enough, that’s when they should have become a buy and hold investor, at the bottom of the bear market, because the market is up a huge amount in the last two and a fraction years.

Same token, people who believe in market timing all of a sudden at the bottom of a bear market now people say you know what, I should have been a market timer all along, but that’s the point at which being a buy and hold investor would end up working better.

So it turns out the popularity of various investment approaches like buy and hold or trading are relatively predictable according to where you are in the market cycle, and it shows that if you really want to be a buy and hold investor you have to have probably more discipline and courage than most people really have.

There’s no shame in admitting that you don’t have it, but don’t announce that you’re a buy and hold investor and start following it, and not have the liquidity and the patience to really follow it through thick and thin.

Because over time, buy and hold does seem to be a strategy that works.

Absolutely. It seems that one would look at it as a contrast between the psychological and the statistical. I tend to take a statistical view of things, and I think, in the realm of statistics, buy and hold investing is overwhelming.

The case for it, I think, is undeniable. Over time, very, very few advisors are able to do better in the market, and this is true not just for newsletters—it’s true for mutual funds, it’s true for professional money managers. We’re all in the same boat in that regard, so the argument statistically is pretty straightforward.

But why, nevertheless, do I not recommend that my clients all go to buy and hold investing? The answer is that I don’t think they can actually stick with it.

So you can go with a strategy that is statistically quite superior, but if it psychologically requires a level of discipline that people don’t have, then they’re actually worse off than had they gone with a statistically inferior strategy, but one that is nevertheless one that they can live with through thick and thin.

Yeah, because trading, on the other hand, can be a very difficult prospect for most investors—to know when to get in and when to get out, and how to profit.

Absolutely. So I think the key thing for an investor, where they can really use a Money Show to greatest advantage, is to find that advisor and strategy that they can live with through thick and thin. And it may be that the strategy that doesn’t look as good on paper as something else, but it may nevertheless be the most appropriate because they can actually follow it.

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