Smart Investor: is buy and hold dead?

Maybe there's a middle way!

I've admitted my lack of experience and knowledge of investing in shares.

I agree 100% about leveraging; it merely adds to the risk you're taking and why compound your risk?

I agree that if analysis shows a company represents good value that it should recover over time and price fluctuations should be ignored and your worst case scenario is it shall go bust.

However; two points:

1. Over time the fundamentals of a company can [and often do] change and a company that you felt from your analysis was worth investing in could gradually deteriorate over a decade or so. Would you prefer to wait until it went bankrupt or salvage a small percentage of your original investment?

2. If you buy shares in a company that you believe has good long term prospects and within weeks you have made a 10%+ capital gain if you sell then surely 'a birdie in the hand is worth more than a potential dodo in the bush'?

My attitude would be that it would be sensible to buy for the long term, but to take a good profit at an early opportunity if it presented itself and also to sell a long term investment if the fundamentals you based your original decision on changed negatively.

I've also thought of either taking the profit out and leaving the original capital or taking the original capital out and let the profit run [in a hypothetical scenario].

You buy 10k of a share. It is now worth £12k. Why not take out your 10k to invest elsewhere and whatever happens to the remaining £2k you've lost nothing from your original investment as your original capital is secure?

I also believe that investing JUST for the sake of making money is a little sad.

In the above example if you took out your £2k profit instead of the original capital why not blow £100 on some luxury you don't really need before reinvesting the remaining profit of £1.9k?

It's good psychologically to reward yourself when things go well as you can't guarantee always being a winner and by spending some of your good fortune can help oil the wheels of our pathetically consumer led society.

I think its impractical to run 30 speculative positions using all of ones capital for many working people. (30 is roughly 3% a position that you could afford to lose). A longer term viewpoint is better for me. I try to use asset allocation to reduce the possibility of large losses if markets are obviously toppy.

It depends what you call 'hold'. If you mean forever then I'd say that's most appropriate for index tracking because any individual company can go bust, but if the FTSE 100 ever goes to zero that's the least of your worries.

In terms of stock picking, I agree that a longer holding period is better, measured in years rather than weeks or months.

In theory this holding period could be forever as long as the investment continued to be good value, but even Buffett sold out a huge chunk of his positions in 1999 (if memory serves) because they were so overvalued.

So I'd say something like buy-and-hold, but even the laid back stock picker should probably re-appraise their holdings each time an annual report comes out.

In reply to df1 above mentioning asset allocation to reduce large losses when market are toppy, you can read a bit about one way of doing that here: http://bit.ly/ukl1Rc which is how my wife's pension is run using stock and bond index trackers.

I moved in and out of shares constantly from 1967 to the early Thatcher years and did extremely well.

Since the mid 80's I became a long term investor and am now very well set up in my retirement.

In other words playing the market in my mind is a young man's game who has less money and more "devil may care" in him.

Now I just want a good quality of life to look after my sheep living in our glorious countryside, with all my little luxuries to hand.

The conclusions I have reached are: Study historical market performance through the use of graphs. You don't have to use complex technical methodology to understand the results. Research companies thoroughly, i.e. crunch the numbers, and do a bit of leg work, visit the premises of the companies you are interested in, if possible. Try to understand volatiility, there's a lot of it about at the moment. It can be caused by an unattractive share price, (a relatively small number of shares in circulation in comparison to volumes traded. However, it would appear to me that the biggest single cause is high frequency trading. These guys use high powered computers stuffed with algorithms, to indentify discrepancies of a few nanoseconds between buy and sell orders. I wonder what Albert Einstein would of thought of that! Personally I can't see how the human brain can compete with it, so now-a-days the marketplace for shares is inherently more risky for the hobby investor.

It's misleading to say the FTSE 100 is at the same level as 1999 for a number of reasons, not least of which are (a) that ignores the beneficial effect of investing regularly as the markets go up and down; (b) it ignores the effect of dividends (as has been shown, reinvested dividends account for over 90% of added value over the long term) and (c) it ignores the changing constituency of the FTSE over time. If you had invested £100 a month in a representative bundle of FTSE 100 companies in 1999 and reinvested all dividends your portfolio would be looking pretty good. Can someone do the maths on that? eg Citywire or perhaps John @ UKValueInvestor.com.

That's not to say you can't enhance that return by good timing - the simplest way is to invest more when the market is at comparative lows (I acknowledge that you can't call the bottom) and take profits when the market is at a comparative high. I would add that the FTSE is NOT in my view currently at a comparative low.

There is one extra element in play right now, which is the serious and present danger of a stockmarket crash and in that situation the prudent investor may feel that reducing his or her exposure to equities until things become clearer might be a sensible strategy.

I'm with JEL G on qualiy of life, but you don't have to spend huge amounts of time stockpicking - that's for the professionals. What you should do (as Smart Investor advocates) is adjust the broad content of your portfolio from time to time to suit your appetite for risk and current market conditions. As a mature student I now have no income other than from investments, so this becomes more important. At the moment my portfolio is roughly 50:50 index linked gilts and cash - very little income, but I'm not prepared to accept the huge risks now facing the market. I will get back into equities when the market settles down. In the meantime JEL G can look at his sheep, and I will write my dissertation.

For what it's worth, my approach is :

1. Select companies you have researched and are happy about, and put them in a "watch list" (I use Moneyextra, but there are lots of others).

2. Monitor the "watch list" frequently.

3. Buy the shares of the companies that are performing well at present.

4. Maintain an unofficial (that is, manual) stop-loss of minus 20%, so that you have discretion if the market is particularly volatile.

5. Sell those shares that have not moved upwards for a period of 3 months, but keep monitoring those shares, and don't feel ashamed to buy them again if their performance improves.

6. Don't buy shares that are still going down. Wait for them to turn the corner and then buy them - but you have to be very sure they're not going to continue to bounce along the bottom.

That seems to me to be the best compromise between "buy-and-hold" and momentum investing, though I am aware it tends more towards the latter.

I kept, on Moneyextra, my original 2006 portfolio, just to see what a true "buy-and-hold" approach would do. The answer is 7.8% rise over 5 years, so I haven't kept pace with inflation. The portfolio contains some real "dogs", e.g. Blue Planet Worldwide Financials, Old Mutual, and Renaissance US Growth. The only shares that show anything like 100% gain are Anglo Pacific and Templeton Emerging Markets. I fully accept my choices may not have been as good as they might have been, but I had good reason then to choose all of them . . . .

If you want to se the effect of reinvested dividends just look at a FTSE 100 or Allshare tracker with and without dividends re-invested.

Maverick - are you including dividends? The pensions industry target (ie actuarial assumption) for equity investments is around 8% PER ANNUM. I speak as a (slightly sceptical) pension fund trustee.

John @ UKV

Interesting article which makes use of both long-term investing and taking sensible profits when appropriate.

JEL G

Glad to hear you had an exciting investment life before you decided to become a long term investor. Yes, I believe that as one's needs and desire to attract or avoid risk change with time have a very profound affect on what you invest in.

One might have to take calculated but fairly high risk to accummulate a large sum of capital; there must come a point where you wish to protect that capital from evaporating into thin air and be happy to accept a lower return for greater security and peace of mind.

I'm between a rock and a hard place in that I still need to build capital but I already rely on the income. I HAVE to take calculated risks in order to both survive and prosper, but one day I'll have my own herd of sheep [or lemmings] and live happily ever after!

"Speculation" is not "investment".

For speculation read gambling.

Thanks Robert.

Drake, I happen to have a spreadsheet which will do what you mention although somewhat simplified - the drip-fed investments are yearly rather than monthly, and the data is not of commercial quality, but it should give a reasonable result.

Putting £1,200 in each year starting 1999 (£100 per month) gives a total investment of 1200*13=£15,600. The results (very roughly) are:

100% in FTSE 100 = about £20,000

100% in RPI linked vehicle of some sort = about £18,500

So only a very slight improvement over 13 years on something inflation linked. In other words, the dividends just about helped the total return keep up with inflation. That's the price of overpaying for the FTSE 100 back in 1999.

A slightly different point that comes up is risk. If you're starting from scratch at £100 a month then the risk of the stock market is virtually irrelevant. Each time you put in another £100 your portfolio has a huge positive gain, so the movements of the stock market are swamped by the size of the new cash coming in. Even after 10 years the new cash coming in is still over 5% of the portfolio. Add in 3-4% dividends and you're getting up to 9% new cash every year. That smooths out the ride quite a lot.

It's only once you've got a big chunk in the stock market relative to your new money coming in that volatility really becomes an issue (as Robert has mentioned).

In my 30 years experience advising investors I am always amazed that intelligent investors that have made their own decisions on how to invest tend to own an assortment of 'flavour of the month' investments and hung on to them for 10 years or more. I could predict which funds they own before they invite me to comment depending upon when they started to invest. Many of my clients are retired and relatively well off - £300k or more of free capital and are looking for either income and growth or just growth, and in general are all in profit over the past year within portfolio's that are usually 1/2 - 1/3rd as volatile as FTSE100 over the past 3 years. Income is defined as dividends and can be targeted relatively reliably. If you know what you're objectives are it really is not difficult to achieve them providing you know where to look.

John @ UKV

The article you gave a link to mentioned bonds; does that mean when you go shy on shares you increase your exposure to corporate bonds or gilts or both and almost consider them as 'cash'?

Volatility is certainly an issue for me but subserviant to income though the two are very closely related over time.

What I'm trying to say is that in the short term I'm not too bothered if the market value of my investments go down in value as long as the income is secure but that I seek capital gains over time to increase the ability to increase income.

Does that make sense?

I had a very strange situation earlier this year where my portfolio of corporate bonds were not only worth more than the purchase price (always a nice feeling however releavant or not) but also exceeded the total maturity value!

I should have immediately gone liquid but didn't as yields were still very good and there was nothing available to reinvest in that could improve my income.

How foolish I was!

I went 50% liquid after prices had already fallen and although I have picked up bonds at what I consider bargain prices I'd have been far better off selling 100% at far greater gains and reinvesting more slowly.

I now feel far happier that the total market value is way below the total maturity value even if slightly below the total purchase bost of these bonds.

Smart Investor has written that he is not in favour of the corporate bond market yet then said he is kindly going to write an article on the subject. That was quite some time ago and I hope he writes his 'no nonsense' article before I die waiting!

John, I am 97% to 98% invested in the corporate bond market and very hesitant to take unknown risks with equities though I have made a few small investments; do you have any advice you'd like to give me?

Drake - No, I was not including dividends - but since I invest mainly for capital gains and not for dividends, the shares tend to be those carrying little or no dividend anyway.

Speaking as a (slightly sceptical) pensions lawyer, if you as a trustee can get your investment manager to produce a return of 8% a year you are doing well - but the short-termism of most investment managers means that they have to get most of that 8% from dividends, and so they go for big blue-chips like BP. Unfortunately the Pensions Regulator wants the pension fund valued every 3 years, and this is the capital value of the shares in the fund and not just the dividend stream. If your BP shares have dropped in value by 25%, the poor old employer has to put in a load more money. No wonder all the defined-benefit schemes are closing . . . .

Richard, personally I'm always 100% in equities, but my wife and many others are not happy with that so a 'shock absorber' is often required. So yes, I use bonds as a counter-cyclical buffer. I currently split 50/50 between government and investment grade corporate bonds via ETFs, so their face value does move around, but it's relatively uncorrelated to equities so there should be a net benefit from price movements when I rebalance (according to MPT anyway).

A 'less risky' approach is to use cash or a one or two year fixed rate vehicle, or something index linked. Just anything that's uncorrelated to equities and pays an income and isn't very volatile.

You can email me by taking the spaces out of my user name but I can't give individual advice, otherwise the Rozzers will have me.

Dear all, I've started a twitter account to offer advice regards the best stocks to buy and hold. Hope it helps

http://twitter.com/#!/Muffeiy

Generally I am a buy and hold investor.

Some of the dogs I have were my original broker advised, RSA, Vodafone, Invensys, Natwest (RBS) HSBC, Abbey Nat (Santander) and Cookson, all long term holdings. For 4 of them my original investment was £18k odd, and today the value (with accretions, including rights issues) is £16k, so taking out accretions (rts issues and divi reinvestment) I am probably down £8k+.

To be fair to the broker, I was also put into some good shares, Lonrho, Hanson, Abbey Nat and HSBC.

Maverick, OM, yes can be a dog, but I made a decent profit out of it, but only because I also bought in at lows, and with that I would add L & G. I hold neither of those, at the moment, they need to drop a way yet, which I reckon will happen, when I will buy in again. I sold too low, hoping to profit when they dropped, They didn't until recently, but a way to go.

Thank you to the contributors, I will now review my holdings, some of which were punts on Questor recommendations, which have come good but remain small holdings with some yield, but could do a lot better. Into GSK, perhaps.

All I can really add is ...

I have found good performance from Etfs and Stocks off my own back.

I have invested in SNGA ( shorting natural gas,check 3 year,1 year and 6 month charts. Profited greatly.

Also Proshares Trust Ultra 20+ Yr Treasury (UBT) ( not available online telephone trades only with my two Sipp accounts)

Check 1 year chart .!! ready to get out soon.

And my favourite Rightmove ( RMV) got the market cornered ,strong company despite the awful house market, can only get stronger.

good stock! 45 Degree chart for 3 years.

Got all the usuals

GSK, Imperial Tobacco,Vodafone,Tesco and a lot of US Oil giants.

Have 20 % in cloud computing ,F5 , Rackspace, EMC Corp. American Tower ( think there is a lot of movement in these yet.

Agricultural, got GNS doing very well since I invested 1 year ago

And of course 2 years of investing in PHAU is paying ALL the bills, but seems that Gold is stopping at $1780 ish .But not ready to sell out just yet.

Buy gold coins

Bury them

End of

@ dr ray

Latest news from Franklin Sanders is beware of counterfeit gold coins believed to have originated in China. Yes they will be made of an alloy of gold, but the colour and specific weight will differ from the genuine article. Apparently the attraction of these forgeries is not necessarily the gold content but more to do with the premium which has to be paid for numismatic coins.

Obviously one needs to be careful but if one sticks to familiar coins such as sovereigns it is very easy to recognise a fake which is more than can be said for most financial products. I have heard of fake Krugerrands but not heard of fake sovereigns apart from crude brass gaming tokens.

I bought my first sovereign from a reputable dealer and spent £5 for a set of electronic jewellery scales and I am pretty confident I could detect a fake as it would likely be cast rather than milled and it would either be thicker or lighter, as most metals are less dense than gold. I have bought a sovereign with an insurance valuation certificate from a large jeweller which was actually a half sovereign so one needs to always be aware of scams (as Madoff's and Equitable Life investors have also found out)

Drake's idea of abandoning equities in favour of gilts and cash does have one negative factor and that is a loss of tax protection in ISAs - is this of little importance or is there a way of moving about in and out of gilts, cash and equities and still retain the ISA wrapper?

Snoekie - You can make money on almost any share if you buy it at the right time! I just think my system gives you a better chance of catching the risers - you won't get the first volcanic rise, but you will get the following steady rise.

I've given up trying to guess what the market will do - there are just too many variables, and I don't have enough information to be able to judge. And even if I did, the markets don't behave logically.

Trading is a zero sum game.

There are statues and there are pigeons.

Which one do you think the private investor is when competing against professionals with all the information at their fingertips and as often as not inside information too?

If you think this is an outrageous accusation to make why not look at what happens to a share price in the days leading up to a takeover or profits warning.

I agree with Dr Ray ...trading is a mugs game and is akin to horse racing where only the insiders know which horses are trying

is buy and hold dead? yes in the short term, yes in the long term, every dog has its day, losers hold on waiting for the dog to come back to life.. you can buy and hold massive corporations but thats not much different to putting it in a bank, pretty safe and boring and even then they can still go bust.. sorry but you nowadays you have to compete with pros and that means doing some work.. hard to beat them but not impossible.

Buy and hold with at least annual common sense review is a very sensible strategy. Dealing charges are a very significant cost over the long term and make frequent trading considerably less than a zero sum game.

It is obvious when the market is at really silly values and if you avoid those peaks, academic studies show that equities have been a great investment over any 10 year timescale since 1900.

Markets should rise approximately in synch with the total economy (inflation + growth). On that basis, we are currently way below the market levels of 1999 which were accounted for by sentiment.

I don't think the market is ridiculously high right now, but it's not exactly cheap either.

Robert- the fear on corporate bonds and any long term Govt bonds is that the relatively low current yield will prove a lot less than inflation, especially with things like quantitative easing around stoking the fires of medium term inflation. If you hold the bond for income and until maturity, your income will be fine in nominal terms but may not hold up against inflation. Capital gains from bonds at current prices and yields are only likley if we get into a 1930's style depression with deflation. Personally, I feel boring equiteies with high yields are a better bet for income and capital protection currently- Vodaphone, Tesco, Unilever. Shell, RSA etc but I must admit I holod the individual shares partly for the fun of following the markets. I would use low TER ETF's if I felt it mattered a great deal whether I did 2 or 3% better or worse than the market.