FOOL'S EYE VIEW
Why Buy and Hold is Best

By Nigel Roberts
March 23, 2001

It is the nature of investors, in particular inexperienced investors, that they are euphoric when markets are climbing and believe that they will go up and up for ever, and that they panic when markets are falling, believing that the downward trend, too, will last forever. The fact is that just as a bull market always eventually comes to an end, so the bear market that we are currently experiencing will not last forever.

Bear markets offer great opportunities for Foolish investors. While most other investors are busy selling their shares, hoping to get out before things get even worse, a Foolish investor can continue to concentrate on the long term and benefit from the weakness in the market by buying more.

For most people the best way to get profit from the stock market is to do just that -- invest in the market. Switch off all of the noise about bull and bear markets and invest your money in the market on a regular basis. Buying into an index tracking unit trust every month will enable you to concentrate on anything and everything else but the market gyrations. Following the market too closely leads investors to make too many buying and selling decisions as they try to react to the latest news, and this leads ultimately to poor investment performance.

Index trackers may well have performed poorly in the last couple of years, but many managed funds have done far worse. And performance over short periods of time really does not matter: two years is simply too short to worry about. Invest your money on a regular basis into an index tracker and then simply forget about it.

If you feel that you want to invest directly in companies, then one of the best strategies is to buy shares in high quality companies and hold them for the long term. Yes, I am advocating the buy and hold strategy, and by long term I really mean pretty much forever. Buy shares in blue-chip companies, stick the share certificates in a bottom drawer and forget about them. Leave them there for years on end. OK, you might want to dust them off once in a while, but don't be tempted to sell them. Buy and hold and don't interfere is the message.

This strategy may not suit everyone's temperament, but over the long term your returns are likely to be much better than the vast majority of investors, and will almost certainly beat the market hands down.

The problem is obviously how to select the good companies to invest your money into in the first place. This is the tricky part.

There are a number of simple ways. For instance, you could buy the ten largest companies on the market. Currently these are:

BP Amoco (LSE: BPA)
Vodafone (LSE: VOD)
GlaxoSmithKline (LSE: GSK)
HSBC (LSE: HSBA)
AstraZeneca (LSE: AZN)
Royal Bank of Scotland (LSE: RBOS)
British Telecom (LSE: BT.A)
Barclays (LSE: BARC)
Lloyds TSB (LSE: LLOY)
Unilever (LSE: ULVR)

This portfolio would give exposure to a good portion of UK business: energy, telecommunications, banking, drugs and food/home products.

Another strategy would be to adopt Stephen Bland (TMFPyad)'s high yield portfolio, which he has discussed here before, which is designed to be likely to give an investor increasing income from the dividend yield as well as capital growth.

The common theme is that these are "long-term buy and forget" portfolios. Once you have bought the shares you must resist the urge to meddle! Forget about the market and think about something else, while you leave your investments to grow.

More: The high yield portfolio