The Buy and Hold Investing Strategy

The buy and hold investing strategy needs some qualification, as the pure form of this strategy is sometimes inappropriate. Change often elicits response, but not all changes warrant a response. Recognizing this differentiation and responding only when appropriate is crucial to successfully implementing a buy and hold strategy.

There are three primary reasons for selling a mutual fund:

1. Something about the fund has changed and it no longer meets your criteria.
2. A major macroeconomic change has occurred or is imminent and you need to reallocate your capital in response to maintain your chosen portfolio characteristics.
3. You need cash now!

There are three primary reasons for buying a mutual fund:

1. Something about a fund you own has changed and it no longer meets your criteria, thus it needs to be replaced with another mutual fund.
2. A major macroeconomic change has occurred or is imminent and you need to reallocate your capital in response to maintain your chosen portfolio characteristics.
3. You have new money to invest. In most cases it should be distributed proportionately across the asset classes in your portfolio.

Selling or buying mutual funds because you think the market is going to move down or up, respectively, is not a valid reason for selling or buying. Selling after the market has plummeted or buying after the market has skyrocketed is worse.

Selling funds to buy the current "hot" funds is just about guaranteed to put you into a long, slow downward spiral. By the time you see a published list of the "current" hot funds, the information is outdated and it's very likely they're no longer hot. If you think chasing these funds is a good idea, you should read up on the Dogs of the Dow theory. The notion that yesterday's losers will be tomorrow's winners and vise versa is also relevant to mutual funds, but the theory is not as strong when applied to mutual funds, as mutual funds are usually broadly diversified within their respective universes. And it would be very difficult to apply this theory to mutual fund investing due to the fact that there are about 7200 mutual funds registered in the U.S. compared to only 30 companies in the Dow-Jones Industrial index.

If you take the time to read through this site, you will learn that mutual funds can and do change, and not always for the better. But even if a fund changes for the better, it may no longer meet your needs. You will also learn on this site that your portfolio should not be just a collection of good mutual funds; it should be a well-conceived group of complementary assets designed to function as an efficient unit. When one of the components of your portfolio changes, a response is often in order.

Also, as the various asset classes respond differently to macroeconomic changes, you may find the need to reallocate your capital among the asset classes in response to such changes. Usually this will only require rebalancing your portfolio in response to differential changes in projected returns.

So a buy and hold strategy should not be considered to be carved in stone, but you need to develop a mindset that gives you the will to hold when your gut is telling you to sell and to sell a fund you love when it no longer meets your needs. Although there is definitely a qualitative aspect to carrying out this strategy effectively, there's no room for emotion here.

Return to the top of The Buy and Hold Investing Strategy.