Trend: The Buy and Hold investment strategy is losing favor among investors due to the losses suffered in the market decline that started in 2008.
We are seeing some investors adopt trading strategies, such as the 50-day / 200-day Moving Average crossover approach to identify buy and sell signals.
The golden cross is a buy signal created when a shorter term moving average crosses above a longer term moving average. It's an especially strong signal when the 50 day moving average crosses above the 200 day moving average. The death cross is the reverse, a sell signal when the 50 day moving average crosses below the 200 day moving average.
Jason Zweig at the Wall Street Journal describes research that challenges some of the assumptions that underlie the Buy and Hold strategy. Excerpts below.
Finance professor Elroy Dimson of London Business School ...estimates that we'll have to wait nine more years before the Dow average, including dividends, has a 50% chance of hitting its 2007 highs.
The report also challenges the conventional wisdom that a run of bad results in the past must be followed by good returns in the future. Following the worst years, stocks outperformed cash over the next five years by an annual average of 7.1 percentage points. But after the best years, stocks outperformed by 6.8 percentage points annually -- a statistical dead heat. "If you were trying to find a rule buried in this as to what investors should do to make money," says Prof. Dimson, "it's kind of hopeless."
The report hammers home another uncomfortable truth. The belief that stocks become virtually riskless if you just hold onto them long enough -- popularized a decade ago in books like Jeremy Siegel's "Stocks for the Long Run" and James Glassman and Kevin Hassett's "Dow 36,000" -- has been shattered by reality. No matter how long your investing horizon may be, the risk of owning risky assets can never go to zero.