Buy and Hold: How to Perpetuate Your Investment Losses

It appears that the only thing that I can agree with him on is, as he says, there is no reasonable way to "know" whether the market is going to be up or down. However, this statement also underscores that he is not familiar with trend tracking methodologies and the idea that one does not need to "know" or "predict" in order to make profitable investment decisions.

I've put together the composite for my trend tracking index in the 80s and it has consistently served me and my clients well by getting us into and out of the markets in a timely manner.

The reader cites Warren Buffett's success. Sure, he is legendary, but remember that he made most of his fortune during one of the greatest bull markets. He is probably now considered beyond good and evil. But what about the numerous stories in the press over the past 3 years of the heavy losses he sustained in Coca Cola and other stocks, by stubbornly holding on to this positions. When you have enough money invested in a wide range of holdings, you become almost bullet proof. Do you fit in that category?

Furthermore, Buffet has resources available that the investing public simply does not have. Saying that he is successful only because of his buy and hold approach, and everyone following this technique will be too, is an oversimplification and does not factor in all the issues.

How many non-millionaires have enough spare capital to keep buying and holding and buying some more while stocks plummet? How long can they wait for the upswing when their cost-averaged holdings will start to show a profit? Do the math! Yes, the market will eventually turn up. But will it recover enough fast enough to reverse your losses in time to do you any real good? If you're 20, then maybe. If you're 60, who knows?

I have received countless e-mails and phone calls from individuals who have been led astray by brokers, financial planners and others using buy-and-hold and dollar cost averaging. Stories abound of retirees having to go back to work just because someone told them that "the market can't go any lower" or "let's dollar cost average."

As for his last point, when I gave the signal to cash out on October 13, 2000, it had nothing to do with either luck or intuition. I had no clue how good of a call that would be; I simply let my indicators be my guide. They pointed to a sell, we considered, and then followed through based on our experience. We held true to our philosophy and kept our emotions, speculations, fears or greed out of the equation. This disciplined approach is what I advocate.

This year it has led us to buy back into the market on 4/29/03. And my detailed analysis and evaluation of a range of funds led us to select some of the best; my top fund being up some 50%.

So, not to be cynical, but to me dollar cost averaging is just a way to spread the pain over a longer period of time and to cloud the obvious with the hope the market will turn around tomorrow. After all, it can't go any lower. Can it?

About The Author

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: http://www.successful-investment.com; ulli@successful-investment.com