Buy-and-Hold Debate Gets Louder as Market Volatility Rises

AdvisorOne blogger Bob Clark makes a similar point in the current issue of Investment Advisor, calling commodities "volatile, market-trend investments that aren't particularly well-suited to a buy-and-hold strategy."

Notwithstanding the notion of excluding commodities or adding bonds within buy-and-hold portfolios, the key argument against buy-and-hold investing in recent years has been the observation that the 2000s were a "lost decade" for stocks, where investors literally ended up with less than they started at decade's end. Indeed, an analysis by CXO Advisory showed that flipping a coin to make investment selections beat the buy-and-hold strategy by 29% on a cumulative return basis over the decade of the 2000s.

An article in Forbes published last week, part of a series vigorously defending the buy-and-hold principle, notes how markets that were down on average by 5.5% after a volatile and gloomy news driven September ended spectacularly up by the end of October, a month that is historically volatile and negative. Writes Forbes' contributor Ellen Dorle:

"As a small example of why you can't time the market, think about how you would feel if you took the word of the prognosticators that your loss in September was certain to snowball because October is more often than not, a down month."

Yet, a recent study, by Mebane Faber of Cambria Investment Management, strenuously objects to the idea that timing the market risks missing the proverbial 10 best days, when owners of stocks earn their reward for staying invested. Rather, Faber's research leads him to recommend that "investors attempt to avoid declining markets where most of the volatility lies."

He concludes that "market timing and risk management is indeed possible, and beneficial to the investor." To be sure, the debate over just how active an investor should be in monitoring and trading markets versus a principled and passive buy-and-hold approach will carry on indefinitely. But today's whipsawing markets ensures that many alert investors today just aren't buying it, while others are holding firmly to their principles."