Is “buy and hold” investing in stocks dead as some in the financial press want to pronounce?
Buy and hold has been the cornerstone of value investing for many years.
Yet, after a period in the stock market following the 2008 collapse of the financial markets, it is tempting to try something different.
That something different for many stock investors is some form of timing the market, which means attempting to buy low and sell high.
While some investors can make active trading (another way to say market timing) work, most that attempt it fail.
They fail because they don’t put the effort into it – guessing is not an investment or trading strategy.
They fail because active trading is hard and requires learning to use new tools (technical analysis).
They fail because sooner or later emotion creeps back into their decision-making process and that always leads to disaster.
However, many buy and hold investors lost one-half of the value of their portfolios in the 2008-09 financial panic.
If active trading is very difficult and prone to disaster and buy and hold loses by default, what is a strategy that can work for the average investor?
Dollar cost averaging is a hybrid of active trading and buy and hold investing.
A dollar cost averaging strategy has a better chance of success over the long term than active investing or static buy and hold.
Dollar cost averaging is an investment strategy that puts a fixed amount of money into stocks each month (or a shorter, but regular period).
The advantages of dollar cost averaging include:
- By investing a fixed amount each period regardless of price, investors remove emotions from the decision-making process.
- Dollar cost averaging invests a fix amount each period, which means investors buy fewer shares when prices are high and more shares when prices are low.
- Dollar cost averaging investors hold stocks longer, which allows great companies to adapt to changing markets and technology.
- A fixed investment each period averts the temptation to jump on the latest “hot tip” or bailout at the first sign of trouble.
Is dollar cost averaging foolproof?
Of course not. Investors must still pick quality stocks and decide when circumstances change and the company is not able to adequately defend its market or new technology puts it at a disadvantage.
No stock investing strategy will be successful all of the time. However, adopting a strategy such as dollar cost averaging (when combined with picking a great company) is a powerful tool investors should consider.
