For the long term, buy and hold stocks


September 12, 1993|By JANE BRYANT QUINN

NEW YORK — New York--What should you do with your long-term investments, with the stock market regularly hitting new highs? Recent history suggests that it's best to leave your money alone. Even if stocks drop, they'll come back again in a short time.

But it wasn't always thus. In the 1970s, stocks took a 40 percent dive, then zigzagged up and down for almost 10 years with no net advance. Buy-and-holders earned an average of 5 percent, entirely from reinvested dividends. "The current popularity of buy-and-hold will be assigned to the scrap heap by the time the next bear market has inflicted its damage," says Dan Sullivan, editor of The Chartist Mutual Fund Timer in Seal Beach, Calif., and, for the moment, bullish on stocks.

Sullivan thinks that investors will turn back to market timing, which was popular in the 1970s but was pretty much discarded in the 1980s. Timers, who try to predict when the market will rise and fall, buy and sell stocks or mutual funds accordingly.

The professional timers' pitch goes straight to a layman's weakest point. "You can't really buy and hold," they say. In a drawn-out bear market, your nerve will break. You'll eventually sell, then compound your loss by not buying back when prices turn up. Or you'll switch your payroll-deduction plan away from stocks and into a money-market fund. Or you'll put off making an investment because the moment feels wrong.

All investors are timers to some degree, even those who believe in buy-and-hold. The more they worry about a downturn, the greater the urge to sell some shares.

Two problems: First, you may be wrong. Second, you may fail to get back in when the market turns and stock prices soar. If you sell your mutual fund at $10 a share, watch it sink to $7, then mistrust the first leg of the rally and fail to reinvest until the fund has risen to $11, your timing ultimately lost you money.

Various newsletters offer stock-market timing advice. But the past performances they show in their sales material may be misleading. For an independent analysis of how well some 135 newsletters performed, get The Hulbert Guide to Financial Newsletters ($27.95, Dearborn Financial Publishing).

But even with newsletters in your pocket, success comes hard. You might fail to act on every scrap of their advice. Their approach might be too sophisticated or require too much trading. If you're not investing tax-deferred retirement money, you'll owe a tax when you take a gain, which usually makes market timing uneconomic. And there's always the risk that your guru will be wrong.

You can be a buy-and-hold investor and still manage your funds in ways that minimize the effect of the bear. You might:

* Spread your money over several types of markets and keep it there. That way, you might always own something that's rising. Robert Farrell, Merrill Lynch's senior investment adviser (and a cautious optimist) suggests buying an international mutual fund, growth fund whose manager leans toward "producer industries like machinery and construction engineering," and a small-company fund.

* Choose mutual funds that aren't always fully invested. Managers who accumulate cash when stocks aren't appealing offer some protection from market slides (that is, if their judgment is correct).

* Choose a percentage of your money to keep in stocks and stick to it. A popular rule is 100 minus your age. At 30, commit 70 percent of your cash to equities; at 65, commit 35 percent. Once a year, compute the value of all your financial assets (including your 401(k) plan) and buy or sell as necessary to restore the proper percentage of stock. To keep those shifts simple, make ** your core holdings no-load (no sales charge) mutual funds.

* Stay out of stocks, period, with money you'll need within five years. That's college tuition for a teen-ager or the proceeds from the sale of your house if you plan to buy a new one. Over short periods, stocks might fall and fail to recover by the time you'll want the cash.

But for long-term investors, cautious forms of buy-and-hold might work out better than trying to guess the unknowable direction of stocks.

-! Washington Post Writers Group

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