The end of buy and hold?

I received a cold call last Thursday from an investment advisor that went along the lines of the following (please speak slowly if you are cold calling me!): Hi I am Todd from XYZ brokerage house and I represent Mr. Big Time Trader. We are holding a seminar on March 16 on trading strategies now. We believe that the buy and hold strategy is a mantra of the buy and hold strategy that no longer works in current market conditions…”

The caller was basically reiterating one of the larger debates occurring about investment strategies. Mainly, is the buy and hold strategy dead? With once steady stocks like GE on the ropes, can you really hold any stock forever?

Fundamentally, if you are going to abandon one strategy, you need a land on a strategy that is as good, if not better, than the one you are leaving. The real life equivalent would be you don’t quit your job in anger without ideally knowing what you are going to be doing next.

What exactly is the landing spot if you abandon the buy and hold strategy? Most likely an active trading strategy (let’s assume even if you are in all cash, at some point, you will deploy it but shun the buy and hold strategy).

Practically speaking, an active trading strategy has the following implications:

1. You are become a stock picker OR you delegate that responsibility to a pro;
2. You are relying heavily on market timing;
3. Higher trading costs (although on some high MER mutual funds, you may end up ahead); and
4. Tax inefficiency from active trading (taxes are payable on sales; more sales = more potential taxes)

If you can master or handle the above then shifting from buy and hold to active trading may be a good move. However, most people I know do not have the time, skill, risk tolerance or a combination of all those factors to make active trading work.

What I often feel after these types of cold calls is that the investment industry is saying pick your poison: buy high MER mutual funds or let us soak up commission by actively trading for you. One way or another, we’ll find a way to make money off of you.

Of course, as Canadian Capitalist pointed out, a buy and hold strategy utilizing dollar cost averaging for a broad based index does not yield bad results over the long term.

Maybe that’s why the caller spoke so fast.