Warren Buffet, Fidelity, and Vanguard all tell you to buy and hold because, in the long run, stocks outperform bonds.
“But wait a minute, wouldn’t it make sense to get out during market turmoil and get back in?” You are not alone in questioning the conventional wisdom. After all, there is only one Warren Buffet and hundreds of millions of us.
There are many reasons why investment professionals tell you to buy and hold.
- Buy and hold is based on the assumption that the markets are efficient and investors are rational, which are not always true.
- They want to keep your money so they can charge the management fee.
For active investors who follow the market very closely and trade often, “buy and hold” makes a lot of sense because stock picking and market timing have proven to be extremely difficult even for professionals.
However, for passive index investors, their biggest risk is failing to take action when actions are warranted. You do need to pay attention to the large trends. When the market volatility is high, it may make sense to pull out to some extend.