Everyone tells you that buy and hold is the best strategy for stocks. The fact that everyone tells you this should be cause for concern and reflection. Under what conditions is buy and hold the best strategy? When is it a strategy to avoid?
Buy and Hold during Bull Markets
The best time to implement a buy and hold strategy is during bull markets. In other words, when stocks are generally rising in value you can benefit from a buy and hold strategy. In such conditions, you can buy an index exchange traded fund, a diversified portfolio of stocks, or an actively managed equity mutual fund and benefit from the rising trend in stocks.
Buy and Sell during Bear Markets
The worst time to implement a buy and hold strategy is during bear markets. During such markets conditions, the longer you hold your equity investment the more likely you are to lose money. A better strategy during bear markets is to buy during sell-offs and to sell during market recoveries.
A case in point is the 2000 to 2007 period. During this time, there was no net price gain in the S&P 500. As such, a buy and hold strategy would have resulted in no net capital gain over a seven year period. If you had used a buy and sell approach, you would have sold in 2000 and bought again in 2003 and sold again in 2007. The result would have been a significant improvement in your investment results.
