The Right Way to Buy and Hold

Trading stocks to make money is a lot like building a great relationship with your mother-in-law.

In theory, it's a brilliant idea. In reality, it's almost impossible.

With the stock market down over the last three years, plenty of people have stepped up to dismiss -- even ridicule -- the concept of buy and hold. The problem is: Buy and sell and buy and sell and buy and sell typically doesn't work.¿

Looking back at the wild swings in the market, you might be tempted to start trading stocks frequently to profit from short-term fluctuations in price. Or maybe you've just given up on stocks altogether and moved your money to cash, thinking you'll hop back in when the market takes off for good.

Here's a list of reasons why those tempting ideas are nothing but terrible.

Study Those Studies

First, you can find numerous academic studies that show how investors aren't good at timing their stock selections or their moves in and out of the market.

In one study, Terrance Odean, an assistant professor at the Haas School of Business at the University of California at Berkeley, found that investors tend to hold losing investments too long and sell their winners too soon. Another research paper found that the households that traded the most had returns worse than average.

Richard Thaler, a behavioral finance professor at the University of Chicago, is preparing a study called Investor Market Timing: Buy High, Sell Low. According to his research, the percentage of new money invested in equities surged from 59% in 1994 to 74% in 2000 -- right as the stock bubble burst.

So much for correctly timing the market.