Buy and Hold: Dumb or Clever?

(MoneyWatch)  It's no secret most Wall Street investing pros think buy and hold is bunk. Over the weekend, FusionIQ's Barry Ritholtz took aim via his The Big Picture blog, pointing out that the default periods Vanguard set in an interactive chart were chosen to ensure Buy and Hold looked fab. But as Ritholtz pointed out in his post, Vanguard's Broken Discipline: The Buy and Hold Model "clever market participants" making fleet-footed moves in and out of the market could in fact have produced "massive outperformance" compared to Buy and Hold.

Ritholtz is of course correct. Clever market participants always will have the ability to outperform. And as a devoted reader of The Big Picture, I am on board that Ritholtz is indeed a pretty clever guy who no doubt delivers for his clients.

The Bigger Picture But let's be honest here: most Americans are about one zero short of ever being able to have Ritholtz or other Wall St. pros manage their money. The average account balance for an American nearing retirement is less than $80,000. That small sum won't get you past the receptionist at the top tier firms; until you come packing $500,000 or typically $1 million you're not going to get a warm welcome.

So most individual investors are left to handle their own portfolios. And the reality is that most individual investors find it very hard to follow a disciplined buy low-sell high game plan, let alone make clever market moves. DALBAR research shows a long history of fund investors' actual returns lagging market returns-often by a wide margin. (Blog colleague Steve Vernon recently wrote about this costly habit of poor timing.)

Which brings me back to the virtues of Buy and Hold investing. It's not perfect, but it is a hell of a lot better than overreacting to every (positive or negative) market twitch. Buy and Hold protects you from some of the most damaging behavioral finance taboos such as recency bias and hindsight bias. Settling on a long-term asset allocation strategy that you then rebalance periodically strikes me as a rational response to the piles of evidence that show it's hard for individual investors to time the markets. Or if you have a strong opinion about where the markets are heading, limit yourself to a tactical small shift of say 5 percent to 10 percent higher/lower from your target allocations. Tweaking a solid buy and hold strategy seems like a pretty clever gambit for most individual investors.