It's really tough being a buy-and-hold investor right now. Traders at least get to do something -- buy this stock, sell that stock. Their decisions might be wrong, sending good money after bad, but at the moment, doing something -- doing anything -- feels better than doing nothing. The buy-and-hold investor is just expected to sit there and take a licking day after day. It's enough to try the patience of a saint.

And if my email is any indication, this market is pushing buy-and-hold investors to their limits right now. More than one has written me lately saying, "I've got to do something. What should I do?"

The conventional answer, of course, is "Do nothing. You bought these stocks for the long term so stick to your guns. In the long term everything will be all right."

And if you've picked your buy-and-hold stocks skillfully, that's the fundamentally correct answer. Even in the technology sector, stocks such as

Cisco Systems

(CSCO) - Get Report

,

Applied Materials

(AMAT) - Get Report

,

Texas Instruments

(TXN) - Get Report

,

Nokia

(NOK) - Get Report

,

EMC

(EMC)

and

Oracle

(ORCL) - Get Report

will recover. These stocks are likely to be great investments in the long run, and the last thing you want to do is sell them now.

But as I see it, a buy-and-hold strategy isn't the same as doing nothing, ever. Rather, buy-and-hold investing is about doing as little as possible -- about disciplined inaction spiced with the occasional dash of activity. The key is knowing when to do something.

Let me explain why I think this is true and give you my opinion of what buy-and-hold investors should be doing now as this bear market in technology continues to unfold.

Don't Just Stand There!

The main problem here is that while buy-and-hold strategies of inaction may be fine most of the time, they don't work well when markets get extremely emotional. For example, as the

Nasdaq

went shooting to the moon last year on its way to an 88% gain -- remember those days? -- buy-and-hold investors found it difficult to stay with their shares of

Intel

(INTC) - Get Report

and

Wal-Mart

(WMT) - Get Report

and

WorldCom

(WCOM)

while stocks like

Xcelera.com

(XLA)

or

InterDigital Communications

(IDCC) - Get Report

rocketed ahead 9,970% and 1,291%, respectively.

I know a lot of buy-and-hold investors who finally just couldn't stand it anymore. They gave in to their understandable emotions and bought stocks like these just in time to watch them plunge. Xcelera, which hit a 52-week high of $112.50, recently traded under $14. InterDigital Communications hit $82 before beginning its descent to the recent $10.13. These buy-and-hold investors found it too hard to do nothing, so they changed investment styles too late in the cycle.

I think the same emotional pressures are at work now on the downside, as buy-and-hold investors see long-cherished positions chopped in half. Applied Materials, for example, has now retraced all of its gains since November 1999 and the stock is almost 60% off its April highs. For

Microsoft

(MSFT) - Get Report

, the damage is even more shocking. The stock has now given back all its gains since November

1998

. The stock is down more than 50% from its high of December 1999.

Add in the possibility that these stocks might have still further to fall before we hit bottom, and it's pretty easy to understand why even dedicated buy-and-holders are contemplating selling just to end the pain.

If you were to graph the activity in a real-world buy-and-hold portfolio against stock market tops and bottoms, here's what you would see in many cases: A flurry of selling at the emotional bottoms followed by a flurry of buying at the emotional top. In between there would be a long, flat period of no activity: the holding part of buy-and-hold.

What I'd like to suggest is a buy-and-hold strategy that leaves completely intact that long, flat period of inactivity when compounding works for the buy-and-hold investor. My strategy leaves the two flurries of activity at each end of the market intact as well. I think it's healthy for your emotions and your portfolio gains to do something when the market is at an emotional high or low.

All I'd like to do is switch the net direction of that activity at the extremes. I'd like to replace emotional selling at the lows with planned buying, and at the highs I'd like to replace emotional buying with planned selling.

The trick here is to combine a buy-and-hold approach with a very common Wall Street strategy called split positions. A split-position strategy works like this: Let's say that Intel is a core buy-and-hold stock in your portfolio and you own 800 shares. You never trade part of this position, say 600 shares. This is called the core. The other 200 form a trading position that you will sell at market tops and then rebuild at market bottoms.

I know this introduces an element of market timing back into your portfolio -- just what you'd hoped to escape with a buy-and-hold strategy. But in the context of a portfolio this isn't as onerous a task as it seems at first.

How to Play the Split

Let's start with a $1 million portfolio -- an arbitrary number, useful because it simplifies the arithmetic. You've got 10 core buy-and-hold positions in that portfolio of, say, $80,000 each. The other $200,000 is divided among some more aggressive stocks, special situations and a few very safe and liquid positions for financial emergencies. In a rising market, the overall value of your portfolio will climb. But inevitably, some of the core buy-and-hold stocks will gain more than others. As that process continues, you'll notice that the allocation among the positions is getting out of line. Instead of representing 8% of your portfolio, for example, Cisco climbs to 10%, then maybe 12%. That's a timing signal to you, and you need to check the valuation of the stock at this point in the market cycle. Compare the current valuation -- use forward price-to-earnings ratios and forward price-to-earnings-to-growth (

PEG) ratios, for instance -- with historic valuations. Look at the chart to see if the stock is putting an unsustainable gap between the current price and the long-term trend (as measured by the 200-day moving average). If the stock is running on vapors, start to sell some of the trading shares in your position.

This kind of analysis won't help pinpoint a market top if everything you own in your core is going up at the same rate (we should all be so lucky). But in all likelihood, you'll have some picks that far outpace others. If at any time you find yourself doing this kind of analysis repeatedly for stocks in your portfolio, it is time to consider the possibility that the entire market is topping and to start taking money off the table.

If you did this last spring or early summer, you still took punishment in your buy-and-hold positions. After all, you held 600 shares and only sold 200 as the market approached its top. But you do have the emotional satisfaction of knowing that you did something -- something right -- by selling even part of your shares then.

Now you're sitting on some cash and thinking about rebuilding positions you trimmed -- and rebuilding them at much lower prices. How quickly you want to repurchase shares in core holdings depends on your read of this market. No doubt, we're still locked in a bear market for technology, and other sectors such as financials aren't looking too healthy, either. So I don't think this is a time to spend all your cash and leap into positions willy-nilly. This stock market could well go down another 10% from here -- after a year-end rally perhaps -- before we put in a final bottom.

On the other hand, individual buy-and-hold candidates are showing signs of hitting a bottom in the next few weeks. For the true long-term investor a nibble here or there may turn out to be a good investment. I say that even though the stock you nibble might still have a bit of further settling to do. After all, tax-loss selling by institutions is still in progress. But a modest buy, a partial position in one stock, will point you in the right direction. The task at hand in this market isn't selling core buy-and-hold positions but figuring out when to make buys that add to those positions, whether it be three weeks from now or six months.

It's Not Too Late

I can hear the grousing about this strategy. Why didn't you tell me this last spring when I could do something about it? Why rub my nose in it now?

Fair enough. Last spring, in my chats and community, I pretty consistently urged everyone to take some money off the table by selling partial positions, but I didn't make this point the subject of a column. In retrospect, I didn't make the argument forcefully enough in a place where more of you could see it. My fault. If I'd known that this bear market would be as long and deep as it has turned out to be, I would have done so. But in the spring I was thinking that we'd be out of the woods by the end of summer and I was more concerned with writing columns on timing the recovery. The "bear trap" rally of August caught me good.

But I'm not describing this strategy now to pour salt in wounds. Nor am I interested in arguing that you should adopt it so that you'll be ready for the next bear market. Frankly, I don't even want to contemplate the next bear until this one is back in its den.

Instead, I'm bringing it up because I think any buy-and-hold investor can implement it now -- even if he or she got caught completely unprepared by this bear last spring. Here's how I'd go about it:

  • Decide which of your core buy-and-hold positions are worth keeping at the center of your portfolio.
  • Declare your current shares your core and decide how big a trading position you'd like to add to that. (Say you own 600 shares of Texas Instruments. If you still believe in the stock, that position becomes your core. And you might set a target of adding 200 more shares to establish your trading position in the stock.)
  • Go through your entire portfolio in that fashion.

TST Recommends

Now, if your portfolio looks like mine does after a market top, you own stocks that looked good when everything was going up but that are now clearly busted. Maybe some of your buy-and-hold positions don't make the cut anymore, either. Maybe you own some momentum stocks, left from when you felt you had to buy something, that still show solid gains. Sell them. This is where the money to build those trading positions in the buy-and-hold stocks will come from.

Sell some of them now. If a stock is truly busted, it's not going to bounce significantly in any near-term rally. So what are you waiting for? Then, sell some of them later. I think we're in for some kind of rally off the October lows. I doubt that it will lift us back to the 52-week highs on most stocks and I doubt that it will hold come January. But investors still should be able to get better prices for some of the stocks they no longer want to own in a month or two than they can now. Do remember, however, that you're not selling because the price is low but because you've decided that you no longer want to own the stock and you'd like to use the cash to buy a better stock.

What to Buy Now

Readers who have followed this column over the last few months will recognize parts of my Core & Edge strategy here. In fact, this blend of market timing and buy-and-hold tactics is at the center of that strategy. The idea of building core and trading positions in stocks also works well with that strategy's emphasis on making timely buys and sells from a small universe of stocks to hold for the long term.

Readers who are coming in late on this strategy can catch up by reading my column,

Stay Centered Without Losing Your Edge. As part of that strategy, I've created a Core & Edge portfolio with 20 recommendations that you can find and follow in the community under the name

Jubakscore&edge. The individual recommendations are drawn -- 10 each -- from my long-term (five years or longer)

50 Best Stocks in the World and

Future Fantastic 50 portfolios. I update that list, in theory, every month.

So here are my recommendations of long-term buy-and-hold stocks that I think are attractively priced to buy now. From the more conservative 50 Best Stocks in the World, I continue to recommend

American Express

(AXP) - Get Report

,

Gillette

(G) - Get Report

,

Home Depot

(HD) - Get Report

, Intel, Microsoft, Texas Instruments, Wal-Mart and WorldCom. I'm taking

Pfizer

(PFE) - Get Report

and

Walt Disney

(DIS) - Get Report

off the list because they have both appreciated modestly over the last month; with the collapse of many other sectors, they no longer represent the best bargains. However, I do expect both stocks to continue to do well. New additions to the list are

Nortel Networks

(NT)

and

Citigroup

(C) - Get Report

.

From the more aggressive Future Fantastic 50 portfolio, there are certainly good reasons to let the current 10 picks ride.

America Online

(AOL)

, Applied Materials,

Charles Schwab

(SCH)

,

E*Trade

(EGRP)

,

Excite@Home

(ATHM) - Get Report

,

JDS Uniphase

(JDSU)

,

Metromedia Fiber Network

(MFNX)

, Nokia,

RF Micro Devices

(RFMD)

, and

Yahoo!

(YHOO)

certainly haven't gone up in price over the last month. But I think a few stocks from the portfolio are even better bargains right now and might only be fleetingly so. So I'm dropping Charles Schwab and @Home in favor of EMC and

PMC-Sierra

(PMCS)

.

Finally, I'd like to highlight one very important caveat to my modified buy-and-hold strategy -- indeed, to any buy-and-hold strategy. A buy-and-hold strategy only works as long as the long-term fundamentals haven't changed at the specific company or in the general market. That's an especially important caveat right now because there's some evidence that at least part of the breakdown in the technology sector is related to a change in leadership among technology stocks.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: America Online, Applied Materials, EMC, E*Trade, Intel, Microsoft, Nokia, Nortel Networks, PMC-Sierra, RF Micro Devices, Schwab, and Texas Instruments. He welcomes your feedback at

mctsc@thestreet.com.

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