In today's choppy markets, some investing pros argue that the strategy of buying and holding stocks, bonds and other investments is dead. The way to make money, many now claim, is by actively jumping in and out of different asset classes.
As a philosophy, "buy and hold" was never about one asset class, but on the nature of market trends to persist over time. The biggest advantage one can have in the market is trading with the trend. In a bull market, buy and hold works like a charm.
For example, while stocks have basically remained flat over the past decade, other asset classes ranging from bonds to gold have soared, and done so persistently. It's not as if you needed the impossibly prescient foresight to jump in and out to most benefit. Gold has been up now for 11 straight years. The best trade would have been to have gone long bullion in 2001 and done nothing -- for the next decade.
As investors, we're never certain if an investment is in a bull market. This is exactly why technique, notably monitoring one's own positions, is crucial. I don't know nor can I control, for example, if shipping stock Genco Shipping and Trading (GNK)
Again, the idea is to buy and hold assets in bull markets, meaning basic portfolio philosophy should be to maintain assets that rise above your purchase price while cutting those that fall below. It's harder than it seems: Our natural instinct is to respond in just the opposite fashion by keeping the losses and cashing in the gains.
To that end, buy and hold should not be confused with "buy and hope," an excuse to hold or -- heaven forbid -- add to losing positions in weak assets. Those losses are the market's way of telling us that, at least for now, we're on the wrong track. Why purposefully turn a small problem into a bigger one?
Buy and hold isn't dead, but blind alliance to any one asset class thankfully is. With more investors, especially those at retirement, now adopting an absolute-return approach, once-esoteric assets like foreign bonds and hard assets have become mainstream -- with each now having enjoyed persistent, multi-year bull runs. And in both situations, investors benefited most from a buy-and-hold approach.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund owned shares of Genco.