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Month: September 2011

The genius behind intelligent investing

Albert Einstein is credited with saying that “the definition of insanity is doing the same thing over and over and expecting a different result.” While I’ll grant you that I am not a genius, I can draw one solid conclusion from his quote: Einstein was not an investor.

If he was, he would know that just because an investment strategy worked last week, last month, or last year, does not mean it will yield the same result in the future. Unlike the laws of physics, the laws of investing aren’t stable. Hence my lack of enthusiasm for the “buy-and-hold” strategy still embraced by many investors.

While buy-and-hold yielded strong results for investors in the late 90s, those same investors have discovered that doing the same thing over and over again in the 2000s most certainly have not yielded the same result. Insane, right?

Not really. Today’s markets are simply too different to expect the same outcomes from the same strategies. The pace of trading, the speed of information, and new technologies can make even the oldest, stablest companies appear obsolete … these factors, along with many others, should inspire investors to drop the buy-and-hold approach for one of buy-and-be-adaptable.

By adopting a buy-and-be-adaptable strategy you can respond to how the market is performing in a given economic climate. If an asset class or investment is doing well stay with that momentum and let the winners run. If something you bought goes down more than 7 to 10 percent don’t sit idly by and watch it continue to drop, take action, admit it was wrong, sell and move on.

A natural question at this point is, doesn’t this approach take more work? To some extent the answer is yes. You have to stay aware of what you own and how it’s performing. You have to be ready and willing to respond. But the rewards of working with investments that are performing have the potential to far outweigh the simple effort of staying on top of your portfolio.

So does this mean that long-term buy-and-hold investing is a thing of the past? Not necessarily. Buy-and-hold may again become a solid strategy in the future. But unless you’re in a position to handle repeated short-term losses in hopes of an unsecured long-term gain, it’s far from genius.