Have you ever been told to buy and hold your investments? This is the advice that many investors receive when stock markets are falling. It isn’t normally touted as frequently when the markets are going up. Throughout the market cycles, how do you decide what to buy, when to hold and when to sell?

The advice to “buy and hold” is based on one premise; that you are holding the right investments that will provide you with good returns over the long run. If you happen to buy at the very top of the market and then want to sell at the bottom, well, that just isn’t a good approach. Is there a better way?

The first question should be “what should I buy and hold?” Having a portfolio that combines stocks and bonds can provide most of the stock market returns but with less volatility than holding just stocks. Stocks and bonds are considered to be different asset classes and combining asset classes that behave differently in different market environments can help a portfolio.

How do you best build a portfolio with exposure to different asset classes? There are many new products on the market. In Canada there are over 4,000 mutual funds available to investors and many new exchange traded funds as well. Within this vast array of choices, there are more decisions to be made. Should you hold individual stocks? Should you be investing in large companies or smaller ones? Should the emphasis be put on domestic or international investments? Within the bond market there are nearly as many choices that will help to ensure that you are properly diversified between Federal bonds, Provincial bonds, Municipal bonds, high yield bonds, preferred shares, real return bonds, etc.

An even bigger decision centres around knowing when to sell. Most investors lack a really good sell discipline which results in missed opportunities to take profits when investments are at high prices. It can also result in holding onto investments as they decline in price. Human nature encourages many people to continue holding onto investments hoping that they will rebound. If they don’t rebound, how do you decide when to sell?

Knowing when to change your asset allocation is another important consideration that is linked to the sell discipline. There are external factors to consider such as changing economic conditions, changing market environments and changing stock prices that can influence your asset allocation decisions. Frequently, we see major life changes as being responsible for altering an asset allocation. Examples would be increased age, marriage/divorce, selling a business and major lifestyle changes such as retirement or receiving a large inheritance; just to name a few.

We help our clients build portfolios with the tactical asset mixture, with geographical diversification and asset class diversification. Over top of that we implement our portfolio management tools with rigorous buy and sell disciplines. When we enter tough markets again (and it is when, not if) will you have the right process in place? If you are not prepared to go for the rollercoaster ride of the markets, call us.