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Five Reasons Why Buy-and-Hold is Dead

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Why it's left a generation of investors shattered.

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Wall Street, in true self-serving style, has harped on buy-and-hold mantra for decades. "Experts" have claimed there's no reliable way to time the market, and you have to be fully invested at all times to benefit from the growth potential that equities offer in the long term.

Millions of Baby Boomers' hopes of a decent retirement lie in ruins at the altar of this buy-and-hold concept. Is there a better way? That would be an interesting topic for further discussion (and I'm sure, debate) in an upcoming article. Here, I want to discuss 5 factors that, in my opinion, are contributing to the slow-but-sure demise of the buy-and-hold concept.

1. Easier access to brokers, cheaper commissions, and the rise of ETFs.

Do you remember calling a broker and placing a trade? Did you ever second-guess your intention while placing the trade? Thanks to fast access to the web that most of us have become accustomed to over the past several years, action often precedes thought. People frequently take longer to deliberate over a Chinese take-out menu than they do over placing a trade.

I often compare it to cash versus credit-card spending: Even though they're substitutes for each other, they can have a different feel, and therefore instigate different behavior.

Furthermore, technology has dramatically driven down the cost of trading. Trading commissions aren't considered to be a barrier to position entry or exit anymore. If a short-term opportunity crops up, investors don't feel shy about taking action.

Furthermore, discount brokers did to full-service brokers what ETFs seem to be doing to their mutual-fund brethren. ETFs offer real-time pricing and instant liquidity, compared to the end-of-day pricing/liquidity of mutual funds. Forget long-term buy-and-hold -- many investors aren't even willing to wait till the closing bell!

Ultimately, easier access to cheap trading opportunities led to infidelity to the buy-and-hold thought process.

2. Easier access to information and susceptibility to peer pressure.

Ubiquitous communication enabled by more efficient and cheaper networking technology has worked wonders in making the world a smaller place. But there's also a dark side. Investors -- by being connected with the rest of the world -- have added to their financial-information biases. I define this as an access to overabundant financial information that's seduced investors into believing they really know a great deal and can keep up with the ever-changing landscape. In reality, it's generated more heat than light: Information is no substitute for knowledge or actionable insight.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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