Published March 2002

Forget ‘buy low, sell high’ strategy;
‘buy and hold’ is the way to go

By Eric Cumley
Columnist

“Buy low and sell high” may sound like an exciting way to invest. Just imagine it: You get in on a stock when its price is way down; you stay with it until it peaks; you sell your shares — and make a big profit. There's just one problem with this picture: It’s just not realistic.

Why is that? Because nobody — not even the most astute market experts — can consistently predict when a market has “peaked’’ or when it has reached its bottom. That’s why the “buy low, sell high’’ investment strategy — also known as “market timing’’ — is so difficult to practice successfully.

You can find a better way to invest than constantly looking for market peaks and valleys. This alternative method is not glamorous. It’s not exciting. It doesn’t even have a jazzy name.

This strategy is known as “buy and hold.’’ If you’re a buy-and-hold investor, you start by picking high-quality stocks that meet your individual goals and your need for diversification. Then, you simply leave these stocks alone — sometimes for years. You pay no attention to short-term price fluctuations. You pay no attention to market trends or “fads.’’ You just stick with your stocks.

Of course, “buy and hold’’ doesn’t mean “buy and forget.’’ It’s important to periodically review your stock holdings, especially if your investment needs have changed. You’ll also need to ascertain whether a stock’s fundamentals have changed.

For example, perhaps a new management team is taking the company in a direction you don’t like. Or maybe the company belongs to an industry that is beginning to fade.

In any case, you’ll want to stay up-to-date on the stocks that you own, but you shouldn’t make a change unless you have a long-term reason for doing so.

Want proof that “buy and hold’’ is more effective than market timing? According to an in-depth study by 1990 Nobel Prize-winning economist William F. Sharpe, a “market timer” would have to be right at least 82 percent of the time to do as well as an investor who simply bought and held stocks.

In another study, Kenneth Fisher, author of “The Wall Street Waltz,” estimates that an investor with an initial stake of $25,000 and the ability to perfectly time the market would earn a place on the Forbes list of “400 Richest Americans’’ after 21 years. The absence of such a stock trader on the Forbes list is further evidence that “market timing” can’t be perfected.

Even if you’re an active investor, do you really want to spend all your time and energy trying to figure out which way the market is going? By following a buy-and-hold strategy, you don’t have to constantly check your stock prices, and you’ll save on the fees and commissions that result from frequent trading. In short, the idea is to look for quality, buy quality, and then stay with quality.

So, the next time you read or hear anything about the “right time” to buy or sell, turn the page or change the channel. You’ll be making a smart move.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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