What is the constant theme for investors throughout the third quarter of 2011? Readers of About Mutual Funds only need to look over my newsletter topics and/or blog posts during the quarter to clearly see one overriding message: Buy and hold is still the best strategy for the average long-term investor.
You don't need to consume large amounts of financial news or even to look at your 401(k) statements to know that the third quarter of 2011 was volatile: The steepest weekly declines and the largest weekly gains for stocks so far this year occurred during the third quarter; one week stocks could be down 5% and the next week it could be up 5%. For example, the second week of September was one of the best weeks of the year, the third week was one of the worst, and the fourth started with three strong days. What does this tell you?
In short, it says that selling during a major decline often results in missing out on major gains. While skilled or lucky traders can be successful in volatile markets, the vast majority of market timing strategies are not successful in outperforming the major market indexes, such as the S&P 500. Consider this possible scenario: The overall stock market, as measured by the S&P 500, ends the year 2011 with a 5% gain. If you miss the best week of the year, and it turns out to be a 5% gain, you will have decreased your gain to zero.