Tuesday, July 28, 2009

* Market Timing vs. Buy And Hold

Over the years I have observed that there are many ways to earn a good return in the market. In addition to buy and hold, some have successfully used various forms of market timing including sector rotation, momentum investing, technical analysis, et. al. Given a person's unique makeup, not all strategies will work for everyone. At the same time, I believe all strategies will fail if the investor is not committed to their selected strategy over the long term.

Recently, Kiplinger published an article looking at a successful market timer and contrasting it with a buy and hold strategy. Below are some key bullets from the article:
  • Bob Parrish lost 70% of his retirement savings based on advice from a financial adviser
  • Parrish fired his financial adviser and decided to try timing the market
  • Parrish did quite well; his portfolio has gained an annualized 23%
  • Market timing is a tough strategy and few do it well. Parrish admits, "I'm savvy enough to recognize I've been very fortunate and that it's not going to last."
  • Mark Matson, a Cincinnati money manager, likens a market-timing strategy "playing Russian roulette"
  • Successful market timing requires three key ingredients: a reliable signal, the ability to interpret the signal correctly and the discipline to act on it.
  • Once you get into market timing, it changes from an investing game to an emotional game
  • The Hulbert Financial Digest has tracked the performance of investing newsletters for almost 30 years. It identified only about two dozen portfolios that have beaten the market over the past 15 years.
As I mentioned above, not all personalities are suited for each type of investing. It could be financially deadly for a compulsive personality to engage in day-trading. At some point the line is crossed between investing and gambling. Like the compulsive gambler, a compulsive day-trader could go broke trying to "win" back their losses.

Buy And Hold Dividend Stocks

Personally, I prefer an investing strategy that requires less daily attention. As a long-term, value-based, dividend income investor, daily market gyrations are just irrelevant noise in the system. Below are five dividend stocks you can buy, hold and sleep at night:
  • Abbott Laboratories (ABT) - Yield: 3.55% - Analysis
  • Emerson Electric Co. (EMR) - Yield: 3.78% - Analysis
  • Johnson & Johnson (JNJ) - Yield: 3.27% - Analysis
  • 3M Co. (MMM) - Yield: 3.20% - Analysis
  • United Technologies Corp. (UTX) - Yield: 2.80% - Analysis
Ultimately, each investor must define what works best for him or her, and have the conviction to stick with it during the good times and the bad. Often the good times are preceded with some very dark days, and if you quit too soon you might just the good time.

Full Disclosure: Long ABT, EMR, JNJ, MMM, UTX. See a list of all my income holdings here.

Tags: [ABT] [EMR] [JNJ] [MMM] [UTX]