Buy and hold still works for those who are young enough to survive the fluctuations.

But most people accumulate and hold over time. When one considers buying all investments at one point in time and then holding, it is a much different proposition from when a person buys at regular intervals over time and holds. The investor who buys over time has an average price which, during down market periods tends to allow them to accumulate larger numbers of shares for the same amount of money. A few of their shares that were bought at the top will be underwater when the market is down, but more of their shares, purchased as a lower cost basis will still be in the money. The problem is that most people just can’t bring themselves to execute the plan consistently.

One of my best investments ever was the result of a company stock purchase plan. We were allowed to have up to 5% of our paycheck each month withheld for stock purchases with a minimum withholding amount of $5. I checked out the stock’s price history and drew a channel, the lower line being about 25% above the trend of the lows and upper line being 25% below trend line of the highs. When the price fell within the channel I had the company withhold 2% of my salary; when it was below the channel I upped my contribution to the full 5%; when it rose above the channel I reduced the withholding amount to the minimum of
$5. It was a simple plan, I executed it consistently, and no matter what happened I stuck to it. I made a lot of money from that plan. And it was so easy. It was my little derivative from the dollar-cost-averaging concept.

I then tried to apply the standard dollar-cost-averaging method to my investing, with equal amounts going into eight different stocks each month. I also selected stocks that offered a dividend reinvestment plan and signed up for that as well. It worked well for a while, but when the market crashed in 2000-01, my portfolio got clobbered. The reason: I didn’t actively manage my portfolio by trimming those companies that had strayed from their original core competencies. The crash itself wasn’t the problem; management change was the problem; higher levels of risk was the problem. My point to this is that, even when you have a good plan, you must always reassess your holding on a regular basis. Every buy and hold strategy requires some maintenance. Otherwise, they are all doomed to mediocrity at best or, complete failure, at worst.

I am a lot older today and my time horizon is much shorter, so I have gotten away from dollar-cost averaging investing styles. I went through a lot of recessions and came out in good shape, but nothing ever compared to this. I was not long stocks very deep into 2008, but have been dabbling again since summer 2009.

- Mark Bern

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