Conventional wisdom has it that buy-and-hold is the best way to play the stock market. Not so any longer, says financial guru Ben Stein.
“Buy-and-hold as a strategy is very questionable,” Stein writes on Yahoo! Finance. “It's worked in the past, but in times of severe market stress, it just doesn't work.”
Major stock indices have essentially been flat for a decade, despite the fact that many of those years produced strong profits.
“In some areas, such as REITs, commodities, energy and autos, the losses have been breathtaking,” Stein says.
To be sure, active trading isn’t so great either.
“Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months,” Stein explains.
So, what's the solution? Stein asks.
“Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds,” he writes.
Stein says a better strategy would be to allocate about 50 percent of your assets to bonds. And, to have plenty of cash on hand — even years of cash.
“Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement,” Stein writes.
“This turns out to be a simply brilliant suggestion.”
Others haven’t given up on buy-and-hold.
Investment strategist Paul Farrell, writing on Marketwatch, advises: “Just buy-and-hold a well-diversified portfolio of three to 11 low-cost no-load index funds.”
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