HUNT VALLEY, Md. ( TheStreet) -- Too many investors operate on adages that deserve debunking or at least questioning. If you're in your 20s or 30s, you have time to correct some outmoded conventional wisdom before it does damage to your portfolio:
"Stocks for the long run" or "the markets always come back"
Of course these seem true when you consider the century-old bull market the U.S. experienced, but there are a lot of Brazilians and Russians that may take a slightly different view. (Granted, in such countries things do not always happen as they do in America; those countries nationalized publicly traded companies.) The Japanese market is down more than 75% from its 1990 peak as I write this article in March 2011. The NASDAQ is still down 45% from its March 2000 peak. There is no assurance markets will come back. And "the long run" is a relative term for each individual.
|Many people ascribe to the Warren Buffett "buy and hold" investing method -- but Warren Buffett isn't one of them. It's a myth.|
"Buy and hold" is how great investors such as Warren Buffett invest.
Anyone who has studied Warren Buffett knows he holds some securities long term, others in the mid term and short term, but rest assured there is no stock he will hold forever. Warren Buffett owned Freddie Mac and considered it one of great companies in the 1980s and 1990s. By the late '90s he noticed some trends in lending that gave him concern, and he sold his shares a decade before the company became the penny stock it is today. He bought PetroChina (PTR - Get Report) and sold it a few short years later when the stock's value exceeded any reasonable sense of value. Bottom line: Buffett is a risk manager buying good assets at fair prices and selling those assets at overvalued prices based on expectations or current valuations.
During the Great Depression, many Americans wished they sold when they were down 10%, 30%, 50% or even 70% before the market hit bottom at 90% down. This adage is a classic tool used by salespeople to stymie a client from selling out securities or transferring their account to another adviser. Salespeople such as brokers are collecting commissions or fees on these assets and want to keep them. Transfer your account if you think the person you are dealing with is not a true professional adviser. Who knows? Your new adviser may just make those losses back quicker and to greater profit than the one you dump.