Don't take "buy and hold" literally

Key Points

The first quarter of each New Year is when careful investors question their strategies and shift their holdings. Yet others ignore this process, adhering slavishly to the "buy and hold" mantra.

Holding on can indeed work wonders for your portfolio under the right circumstances, but only if you keep your eyes wide open and make your selling decisions without emotion. Even Warren Buffett, well-known for holding his shares for the long run, isn't always a "forever" kind of guy. Contrary to popular wisdom, he does sell, as he did in 1998 with McDonald's and several other securities.

So, how long should you hang onto your stocks and funds? Generally, I subscribe to a three- to five-year time frame because of the correlation with US economic and political cycles of the same length. Any promising new idea or product a public company proposes usually bears fruit within that period. And, I expect my stock picks to reach the price target I've set for them within about four years.

Make sure you do periodic reviews

Assess your mutual fund investments once or twice a year. Fund managers study and prune their holdings on a daily basis, so you don't have to. Your only concern is how well your fund performs as compared to others in the same sector or asset class. If your fund's returns are below the average for others in its sector or class by seven to 10 percentage points over a two-year period, and continues this slide into the third year, it's time to sell.

If your fund is outperforming others in its class, stay put. But keep in mind that a stock fund that's gone gangbusters for a few years could throw off your portfolio's balance. You'll need to eventually sell some shares to prevent your asset allocation from being too heavy in one area.

While you can judge your mutual funds annually or semiannually, you'll need to study your individual stock holdings at least monthly-or more frequently if there are any issues brewing. If your stock's price is moving down, particularly relative to those of other stocks in its industry, question why. Is it because of temporary misfortune, or are there fundamental problems within the company? It's tough to assess these issues, so rely on analyst reports in Value Line ( http://www.valueline.com) or Morningstar ( http://www.morningstar.com), for example.

If you determine that the stock's down for temporary reasons, hold on. But if the fundamentals are all wrong, sell. If, on the other hand, your stock climbs month after month, keep assessing it and sell shares periodically to rebalance your portfolio. When to sell a stock is entirely a judgment call. If you're not comfortable making that decision, use mutual funds for your stock holdings, or rely on an investment adviser to manage your portfolio.

With both stocks and funds, how long you should hold is based on when you should sell. Be sure those decisions are well-informed, logical, and unemotional.

The author, a fee-only certified financial planner (CFP), is president of L.J. Altfest & Co. ( http://www.altfest.com), a financial planning and investment management firm in New York City, and an associate professor of finance at Pace University. The ideas expressed in this column are his alone, and do not represent the views of Medical Economics. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics, 123 Tice Blvd., Woodcliff Lake, NJ 07677-7664. You may also fax your question to 201-690-5420 or e-mail it to meinvestment@advanstar.com
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