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Moderation In All Things


I like, enjoy, and respect Warren Buffett.  He is not an advocate of frequent trading, especially to time the market ups-and-downs, and he has said his favorite holding period for a stock is forever.  His comments are frequently cited as corroboration for the “buy-and-hold” approach to investing.  Unfortunately, this approach has become more than a theory.  It has become a religion to some advisors and their clients.

Frankly, it is difficult to deny the impact of market timing.  Take a look at this graph:

 Chart of the Day
While it is true that a clairvoyant investor with perfect knowledge could have realized a gain of 119%, IF they had invested all their money at the market’s nadir on March 19th, 2009 and held it until today, NOBODY actually did that.  It is strictly a theoretical possibility!
But, if a less clairvoyant investor had invested in December of 1999 at the peak, the Dow is up a mere 7.4% on an inflation-adjusted basis – over SIXTEEN years — so, how happy is that “buy-and-hold” investor? 

Like most things in life, moderation is more appropriate than the extremes of either “buy-and-hold forever” or frequent trading to “time the market.”  Some advisors insist their clients always remain fully-invested.  I subscribe to the notion that your cash level should reflect your anxiety level.  As your fear rises, so should your cash level.  Yes, that may hurt your investment performance in the long run, but it will also protect your health if you can sleep better at night.  After all, what is more important — your investment performance or your health?  No, seriously??

“Buy-and-hold” investing ignores a person’s shifting risk tolerance.

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