Buy & Hold vs. Market Timing

by Lita Epstein, MostChoice.com

Many investors make the mistake believing that they can time the market. Those who have been most successful find the buy and hold strategy works the best. In fact, billionaire investor Warren Buffett goes one step further. He recommends that one buys good companies and holds them "forever."

In a quote from the Owner's Manual for Berkshire Hathaway stock, Chairman and CEO Warren E. Buffett writes: "As owners of, say, Coca-Cola or Gillette shares, we think of Berkshire as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term progress of the companies rather than by the month-to-month movements of their stocks. In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price."

Market timers believe that they can buy low and sell high. The problem is that few can accurately time the market. In fact one study done at the University of Michigan for the period from December 31, 1981 to August 25, 1987 showed that stocks returned an average of 26.3% annually. During that period there were 10 days when the largest price advances occurred. If you missed those ten days, your annual return would have been only 18.3% or a loss of one-third of the market's return. Take out the 20 biggest days and the annual return would have been 13.1% or a 50.2% loss of the market's return.

Not everyone is as perfect at picking stocks as Warren Buffett. So the idea that you hold a company forever may not work. Knowing when to sell your stocks or mutual funds requires regular monitoring of the quarterly reports you receive either from an individual company or from a mutual fund company, depending on the type of investment you select.

You may want help putting together a strong portfolio for both your short and long term goals. Contact us to find a expert local advisor who will help you develop plans to meet your financial needs.