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Missed opportunities

There’s a perception that buy-and-hold investors can’t take advantage of opportunities when markets are down. The assumption is their portfolios are static. In our 60/40 example, however, this is only true with respect to asset mix. The holdings that make up the portfolio will adjust and evolve over time. Moves are made to keep the portfolio on plan, most of which fall into the category of rebalancing.

This year for instance, our 60/40 investor needed to add to stocks in March after they dropped below her target level. If she was truly rebalancing, she would have added to stocks or funds that were down the most. Today, any contributions would be allocated to fixed income.

Outside the box

The key to any strategy, buy and hold included, is to give it a chance to play out. You can’t hop on and off and expect to be successful. This doesn’t preclude you from changing to another approach that fits your personality, skills, and needs better, but wholesale changes should be done rarely and with careful thought.

It can be expensive to switch from indexing to trading stocks, or focusing solely on low-volatility stocks, or trying to time the market (i.e. trading commissions, transfer fees and capital gains taxes) and there’s often a short to medium-term performance shortfall. Numerous U.S. studies have shown that when pension funds change investment managers, the fired ones do better on average than the shiny new ones in the subsequent few years.

The buy-and-hold approach has been out of vogue before, and will be again, but it has a lot going for it. It’s simple to implement and, like Mr. Buffett and other investment tenets, has served investors well over many decades.

Tom Bradley ischair and chief investment officerat Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at [email protected].