Buy and Hold Strategy
The Buy and Hold strategy suggests investing in high-value stocks or mutual funds and leaving them in place long term based on the assumption that, over time, the market increases in value. The investors who employ this strategy assume that since the market will increase in value over time, their investment will too.

While the traditional Buy and Hold strategy can bring diversity to a portfolio's overall strategy, market conditions in the last 11 years have shown that Buy and Hold strategies have significant disadvantages that well-informed investors will want to keep in mind.

Downsides of the Buy and Hold Strategy

• Always in the market : No matter what the market conditions are, your portfolio stays invested, and will increase and decrease in value.
• Long-term issues: If there is a long-running Bear market, a large percentage of your portfolio can be lost.
• Good Companies, Bad Investments: A company's stock may not actually increase in value over time.
• Money Management: You have no effective way to optimize your investment, using money management principles.

• Effective Entries and Exits: You will only invest in the market when it is profitable to do so.
• Protected Investments: Safeguard your investment, by moving money out of the market when the probability to incure losses are high.
• Rising Value: You only invest in funds that are increasing in value.
• Profits: You protect your profits in negative environments and let your profits run in positive environments.

The information below highlights some interesting results. Comparing various scenarios, between Buy & Hold investments and a Market Timing strategy, significant differences are seen in the final equity value. Also, the maximum drawdown which is the maximum loss in relation to the highest equity peak at any time, is significantly reduced when entry and exit points are used.

Click chart for close up view

Russell 2000 Index - Long and Short The above chart of the Russell 2000 Index (RUT-I) can be traded with an ishare "IWM" for example. FundSpectrum's Timing Signal is displayed on the price graph as buy (green) and sell (red) arrows. On average, no more than 5 to 6 signals are generated per year. The bottom part of the chart shows two "equity curves", in dollar values. 1. The red line - represents the total equity curve after investing an initial $10,000 in the RUT-I, using Market Timing. 2. The blue line - shows the corresponding equity curve for a "Buy & Hold" strategy.

Nasdaq-100 Index (QQQQ) - Long and Short This is a similar chart as above, but now we have invested in the Nasdaq 100, using the "QQQQ" Exchange Traded Fund. During the Sell periods a "Short" position has been taken.

Rydex Mekros (RYMKX) - Long only This chart shows a similar benefit of using Market Timing as opposed to Buy & Hold, when investing in the Rydex Mekros Fund. This particular strategy uses a cash position during the "Sell" periods.