The classic investment philosophy taught to preceding generations has been "buy and hold." There is little question that "buy and hold" worked well over long periods of time and those who bought stocks and held them for 20, 30, or 40 years often had a decent gain, even after inflation. Today, however, we might be hard pressed to convince a 60-year old who has just seen his 401(k) or other portfolio drop by 40% or 50% in the past year that buy and hold is the way to go. Undoubtedly, someone will say just hang on, it will come back, but the fact is it won't if the investments were in Washington Mutual, or Bear Stearns, or Lehman Brothers, or the like. That money is gone forever and many times with it the quality of a retirement.

I don't mean to say that I am completely against the buy and hold approach to investing as long as the investor has an answer to the question: Hold until when? I personally use a technical approach as the trigger to exit a position, but whatever an investor is going to use as an exit strategy, I believe anything is better than hold until I die. Unfortunately those brokers who have sold the public on the buy and hold strategy rarely include any strategy to get out when things turn south -- and at some times, the markets always do turn south.

Among my objections to buy and hold are the possibilities that a stock can go to zero, that an investor may have an important need for his money at a time (like now) when stocks are depressed, that a drop of 50% means a position must move back up 100% just to get back to even (and that doesn't usually happen very fast), and that the investor who holds until death may never enjoy the qualities of life that any gains may help provide (though his heirs probably will).

Having lived long enough to watch a lot of people live their lives, I am convinced that more folks need additional streams of income so they can pay their bills each month than need to have buy and hold positions that may or may not show great gains at some time in the future when the money is needed. If we just look at someone today who is about to retire and who had relied upon investments in a 401(k) to get him through his retirement years we can easily see how he would be better off having created additional streams of income instead of having been resigned to a buy and hold investment. Social Security may provide a stream, but we know that at the very best it can provide only a small portion of the solution for the new retiree whose investments in both equities and real estate have been devastated.

My personal investment philosophy does have a place for a modified buy and hold strategy. The modification is that I have an exit plan when the market begins a move against me. Perhaps even more importantly, however, I believe that creation of diverse streams of income from different sources can be a critical element in assuring financial comfort. My new book, "Smart Investors Money Machine" (Wiley & Sons 2009), that is scheduled for release shortly addresses many of the ways almost any of us can create these streams of income with just a little effort. Most of us need money now, at the end of the month, so we can pay our bills, but few of us have streams of income besides our jobs to enable us to pay those bills. The fact is, as I demonstrate in "Smart Investors Money Machine," that there are many ways we can create added streams of income that bring in regular cash without a great deal of time and effort. Generally the most time and effort required to add these streams of income is expended in learning what to do and how to do it. As I explain in the book, the methods can be relatively easy to learn and can be very rewarding in terms of enhanced lifestyle and permitting more time for the things we enjoy.

Bottom line for me is that I'd much prefer enjoying a number of income streams than agonizing over losses in a 401(k). Who wouldn't? The fact is, that nearly everyone can add streams of income in their lives once they have the know-how.

Good Trading!
Bill Kraft

March 21, 2009

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