MARKET COMMENT
Time To Abandon Buy And Hold?

By Maynard Paton (TMFMayn)
December 18, 2002

The stock market has taken a battering over the past two or three years. Old hands will know that the latest downturn is a regular, and indeed welcome, occurrence when stock picking for the longer term. However, those with less market experience can be put off in such market conditions.

Indeed, some investors, thinking they have been recently "burned" by a long-term buy and hold philosophy, are being encouraged into more active "strategies". Well-known stock market pundits writing in well-known newspapers often write something like this:

"In stock market conditions like these, popular approaches to investing such as buying and holding for the long run are likely to disappoint investors. The buy-and-hold technique typically produces losses when employed after periods of above average growth."

So, should the ordinary investor switch from a long-term investment strategy now that the market has fallen?

Firstly, let's take the passive long-term investor who drip-feeds money into an index tracker. The course of action is simple -- continue with the tracker. It must not be forgotten that Shares Continue to Outperform All Other Investments Steadily Over the Long Term. Over any 25-year period you care to mention, shares have beaten all other mainstream alternatives.

Now, let's turn our attention to the individual long-term stock picker. Time to adopt a shorter-term trading strategy? Of course not, unless a sudden ability to predict market movements has been developed. In general, it's far easier to stick with making predictions such as "Unilever (LSE: ULVR) will be selling more food in five years' time" rather than second-guessing how 'market sentiment' will affect Unilever's share price next month.

Trying to consistently beat the market average is difficult, whichever way you select your shares. And chopping and changing your stock picking strategy every time the market takes a turn is a sure-fire route to underperformance. Stock pickers should remember that the performance of individual shares will always vary enormously from the market index.

All in all, investors should continue with their preferred investment process -- tracker or individual shares -- irrespective of how the overall stock market is performing. 

More: Learn about Index Trackers in the Motley Fool's ISA Centre | Market? What Market? | Shares Continue to Outperform All Other Investment Steadily Over the Long Term | Three Cheers For Mr Market!

A version of this article was first published in July 2001