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Does buy-and-hold beat market timing?

For years market pundits have been telling us that the buy-and-hold strategy always beats market timing. Market timing is a strategy that reacts quickly to changing market conditions both upward and downward. Recent studies have unsurprisingly confirmed that in 99.8 percent of cases, a buy-and-hold strategy outperforms market timing.

The authors studied data from 1926 to 1999 to determine whether market timing was an effective strategy compared to the buy-and-hold strategy. They analyzed a variety of statistics and market timing sequences, resulting in more than one million differ­ent outcomes. Each of these outcomes was compared to the buy-and-hold strategy for the same time period.

The fact is, everyone owning stocks or funds when prices are rising can make money. The trick to making money is how long do you hold them for?

If you’re engaging in a buy-and-hold strategy and plan to own your investments for five or ten years or more, don’t be tempted to check the prices on a daily basis, otherwise you are in danger of becoming a mar­ket timer, particularly if the price is down.

To put your odds of buy-and-hold success into per­spective, consider these statistics:

  • Odds that you’ll win the lottery: 1 in 14,000,000.
  • Odds that Earth will be struck by a meteor during your lifetime: 1 in 9,000.
  • Odds that the airlines will lose your luggage: 1 in 186.
  • Odds that you’ll go to Disney World this year: 1 in 10.
  • Odds that you’ll eat out today: 5 in 10.
  • Odds that an investment in stocks will make money in any given year: 7 in 10.

Over the past 100 years, the stock market has made money 70 percent of the time. The fact that it didn’t in 2000, 2001, or 2002 is both uncommon and irrelevant to your long-term planning. Therefore, you should not let this recent performance affect your long-term in­vestment strategy.

Why did you buy the investment in the first place? Were you buying it because you were hoping it would double in value, or was it part of a diversified portfolio with a specific objective in mind such as early retire­ment or paying for education fees for your children?

The latter is probably closer to the truth and yes, it’s very possible that you may need to sell your invest­ments and buy something else that is better designed to help you achieve your objectives. Particularly so if an investment is no longer in line with your original objectives. This does not make you a market timing investor, but confirms you as a buy-and-hold investor.

In summary, consider why you are investing and ensure you have a spread of investments to minimize risk with access to different geographical markets and investment management styles. Most importantly, be prepared to review annually the performance and your reasons for investing.