Dividend Stocks

Investing In Stocks For The Sake Of Cash Flow

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Is “Buy and Hold” Still Viable?

Posted on | June 12, 2011 | Comments Off

When the market crashed in 2008, many were quick to scream that “buy and hold” was dead.  Buy and hold is the investment philosophy that is pushed at the masses from Wall Street like crazy.  Before we get into the merits of the philosophy, let us first recognize who pushes the philosophy the most and why.  Wall Street pushes it because they stand the most to gain from a fully invested public.  Whether it is 401(k) plans, mutual funds, investment advisers, whatever, the consensus philosophy that is communicated from those who are in the business of making money off investors is the following:

  1. You should always be fully invested until you need to withdraw money for retirement
  2. You should always be buying more stocks
  3. The reasons for #1 and #2 is because the stock market will always go up as long as you give it enough time
  4. Diversification is the key to avoid massive losses; that is, spread your bets around enough so that a single of a few failures won’t jeopardize your portfolio (we saw again in 2008 how diversification does nothing to prevent catastrophic losses in a market crash but that is another point).

I’m always suspicious of any consensus view on investing, and I always take into account who is the main communicator of a specific philosophy.  Let’s be clear: the one’s pushing this philosophy have done much better in the last decade than the one’s buying into it.

So is “buy and hold” still viable?  I don’t like the philosophy with regards to the broad markets, but that is mostly for economic reasons.  With regards to individual dividend stocks, the philosophy is still very much alive, but let’s not confuse buy and hold with buy and forget.

We never forget our stocks; in fact, as buy and hold investors we know these stocks that we hold better than any other investor.  That is the goal: to intimately know much about each and every stock we own, and especially any we hold over a prolonged period of time.

When should we buy and when should we hold?

To avoid over-trading, we very rarely sell our core dividend stocks.  Our goal is to build positions over years so selling defeats the purpose.  Only in extreme circumstances would we do this.  So, the question is when do we buy and when do we hold.  Well, when everyone is back into the idea of “buying and holding” (such as now) this is essentially when we hold.  When everyone is questioning the validity of investing and in buying and holding (as they did in 2008/2009) that is when we buy hand over fist.  Each assumes the fundamental basis for owning a company is still very much in tact.

Now when we refer to the current market as a holding market because stocks have had a great run it doesn’t mean we don’t ever buy.  We may be reinvesting dividends or buying in smaller increments.  It mostly refers to not buying intensely.  The buy period is when we buy in bulk.  We’re loading up on shares as much as we can.  I look forward to a time in the future when we can enter this phase.  For now we wait.