To buy and hold, or not to buy and hold?

Yesterday there was an article in the Wall Street Journal titled More Investors Say Bye-Bye to Buy and Hold. The following is an excerpt from that article:

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"For much of the past decade, Kenneth Kimmons of Bedford, Texas, was a buy-and-hold investor. He regularly socked away money in mutual funds across his 401(k) plans, individual retirement accounts and a brokerage account.

But after watching his investments fall by about 50% last year, he started trading individual stocks and options full-time last fall. He generally buys stocks at the start of the trading day -- lately, it's been bank stocks -- and sells them a few hours later. "I just got tired of putting money away and losing it," says the 31-year-old. He says he's doubled his money since he started trading full-time.

The ups and downs of the market are prompting more retail investors to abandon buy-and-hold strategies in favor of opportunistic trading. Some want more control over their money, so they are fleeing funds and advisers -- not to mention the feelings of helplessness raised by recent months' losses. Some are attempting to recoup their losses, while others are stepping back into the markets after a recent string of stock gains and better-than-expected economic news.

Most financial advisers still believe investors should stay the course, pointing out that frequent trading can incur fees, erode returns and result in higher tax bills. But many individuals have lost faith in the long-term growth of their investments and are trying to make money off the market's volatility."

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I have read on a couple websites that the last several months have been some of the best months for trading that anyone can remember. I can also understand why many people have lost faith in long-term investment growth and are trying a different approach.

However, one needs to remember that these are extraordinary times in the markets. Eventually the volatility will subside and the stock market will reenter another period of reasonable growth. Daytrading the stock market is not a viable long-term strategy for pursuing your financial goals.

I suspect some of those who are daytrading are trying to make up for their losses in the past six months. It's a bit desperate and it's not too different than gambling at a casino, because most people who daytrade actually lose money after taking into account the commissions and fees. And for the fortunate ones that actually make some money, doing your taxes isn't exactly a picnic either.

However, I also don't believe financial advisers should just blindly tell their clients to "stay the course". These advisers were saying this over and over in the last few months of 2008, and look where their clients are now. In most cases, their clients would have been much better off by selling their stock holdings earlier. I doubt these advisers really understood what was happening in the marketplace.

In my opinion, I think it's okay to make occasional trades, but only on very sporadic occasions based on market events or company announcements. Early last year, surveys of economists suggested that the economy was either in a recession or on the verge of a recession, yet the stock market had barely moved from its 2007 peak. In these cases, I think it makes sense to reduce allocation of the most sensitive holdings to market events, or buy options that protect investors on the downside without the need to sell the underlying stock holdings. Your adviser should understand the macroeconomic forces that help move the market, because this understanding will help protect your personal assets while keeping your long-range goals in mind.