On this site we have long taken the position that buy-and-hold is a potential suckers bet. That has never been more true than it is right now. With the stock market churning in record territory, you may be better off holding individual stocks through online stock trading, rather than holding funds that you are prepared to sit with for the next 10 or 20 years.
When markets reach new highs, the investment strategies that won the day earlier in the market cycle usually don?t work any more. And that calls for new strategies.
Buy-and-hold in a record market
As a strategy, buy-and-hold has its finest moments early in bull markets. If you can get into the market after major blowouts, such as the 2000 ? 2002, and 2007 ? 2009 markets, you can get explosive returns simply by sitting in mutual funds and exchange traded funds (ETF?s).
But as markets move toward new highs, the peaceful tranquility of buy-and-hold can become something of a fools game. The same dynamic that resulted in spectacular gains on the way up, reverses and takes a heavy toll on your portfolio. This can be especially true with managed funds, which seem to do especially poorly in declining markets.
Rather than viewing buy-and-hold as a permanent investment strategy, it may be best to use it as a temporary strategy that is best employed after a market collapse. At that point, stocks are cheap and you can ride the elevator up when the market begins rising. Stock selection is far less important at the beginning of a bull market than it is near a market top.
The importance of being ready for anything
Record markets favor special situations. Right now, we are most definitely in a record market. That should make us begin to think about changing investment strategies.
For starters, this is an excellent time to reduce exposure to the equity markets. Increasing positions in no risk or low risk investments should be a high priority. It should include moving money into treasury securities, certificate of deposit and even money market funds.
Not only do fixed income investments protect your portfolio value by reducing your exposure to equities, but they also provide you with a solid base of cash-type investments that you can draw on later on to buy stocks after the next sell off. You can bet that one is coming.
On the equity side, you might want to consider greater emphasis on individual stocks, rather than on funds. In peak markets, investors become much more selective. It?s no longer a matter of pouring your money into anything stock market related, and waiting for it to rise in value. Investors begin looking for special situations, including high dividend-yield stocks, stocks that are out of favor, and stocks of companies that are outperforming their competitors in their industry.
Not as easy to determine are stocks that stand to benefit from reversals in either the stock market or the economy. They may be the best performers of all, but you?d need a crystal ball to find them before the fact.
Trading quick and on the cheap
One of the biggest problems of trading individual stocks is fees. Quite simply, trading individual stocks ? unlike taking long-term positions in mutual funds and ETF?s ? often requires that you make more trades. Since there is a transaction fee associated with any trade, more trades equals higher fees.
Transaction fees are a big enough problem in the way that they eat into your investment gains. But they add insult to injury if the investment goes sour and you have to sell at a loss.
If you?re going to trade individual stocks ? and even funds ? quickly and inexpensively, you?ll need to find a good but inexpensive online investment broker. For example, you can
buy shares online with E*Trade, and other online brokers for just a few dollars per transaction, and with minimal maintenance fees.
If you?re going to trade stocks, and you need execute orders quickly and inexpensively, you can have an investment account set up with just such an online broker. And in this market, you absolutely need to have just such an account.
With the market being top-heavy, we need to be prepared for whatever may happen. Should the market begin to reverse, it could do so in spectacular fashion. That would leave little room for last-minute maneuvers. You need to have your portfolio set up in such a way that a substantial amount of your capital will be preserved, and that you have the ability to make a quick exit out of any failing equity positions, and into the newest rising stars.
Are you considering making changes in your investment strategy given that the market is in record territory?