Buy and Hold
There are a lot of investors/advisers out there who will recommend buying stocks and simply holding them forever. This strategy is known as Buy and Hold, I like to call it Buy and Hope. If you buy a stock with the intention of holding it forever you will need a few key qualities: nerves of steel (because your account will suffer huge draw downs (losses) during certain market cycles; can you handle watching your stocks get hammered without panicking? You will need to display little interest in controlling and molding your investment outcomes. This will mean that you will have to not watch and follow the markets much, because without iron clad nerves, you will be prone to make the worst decisions at the worst times (very common problem with individual buy/hold investors). Also you will have to "hope" that you picked right initially in choosing a strong stock. If you are going to be a passive investor, you will be at the mercy of the market. There is nothing wrong with that, some people are very content in adding a certain percentage into their company 401k every month and never checking the balance or the holdings within it. For the vast majority of market history buy and hold has worked well; it works great when the market goes straight up like it did from the 60's to the late 90's. You just must know what kind of person you are and whether you can handle having your financial future be passively managed.
Buy and Homework
This method is Jim Cramer's strategy for long term investing and this is something that is much more prudent that simple buy and hold. Jim has a tv show on CNBC called "Mad Money" and for new investors it offers a wealth of knowledge and great stock picking ideas. Jim advocates looking at the long term but making sure the companies you are choosing to invest in are still on the up-and-up as it were. The strategy hinges around buying the strongest stocks that are leading their respective industries. He wants you to monitor your stocks each quarter after they announce their earnings results and make sure they are still growing to your standards. This involves being more active in your investing approach and requires some interest in following the financial structure of your investments. Which is of course a very good idea! You should never blindly put your money into investments that you don't understand. For longer term investors I would recommend Jim's Buy and Homework strategy.
Market Timing Strategies
An alternative to long term holding strategies are strategies that include technical analysis (studying price) to determine when you should be investing and when you should be holding more cash in your accounts. This is the strategy I prefer and tend to be more short-term in my investing tactics. Now just because you are using a timing method doesn't mean you are in and out fast and often. There are very simple timing strategies that investors can use with a long-term perspective.
20 Month Moving Average
The basis of this timing strategy is to be invested in the market when the stock or Index (SP500, Dow, Nasdaq) are trading above their 20 month moving average. Conversely you would want to be out of the market or short the market when it is trading below the 20 month average. Here's a quick look at the 20 month moving average strategy:
While not perfectly buying the exact bottom or selling the exact top, this sort of timing misses the majority of large scale crashes and catches the majority of the significant rallies. There are several variations on the moving average strategy (10 month average, Crossing averages, etc)
MACD
Other strategies can include using an indicator such as MACD (moving average convergence/divergence as a buy sell signal):
This is a great indicator in detecting large moves up and down. When the MACD line crosses blow the gray signal line that is a sell signal, when the MACD crosses above the signal like that is a buy signal. The only flaw in the plan is that it can get tricked in certain instances. For example in late 2011-early 2012 we saw what is referred to as a whipsaw. Where the indicator signals a trend change, but price then turns and reverses back in the previous direction. But all-in-all this simple indicator would have served you very well over the last 14 years. The market basically saw a zero return from 2000 to our current date, while the MACD strategy would have returned ~500 SP500 points and would have been a significant winner.
Trendlines
Another way to determine a trend change is to use trendline supports as signals. When a trendline support is broken that is a sell signal; when a trendline resistance is broken that is a buy signal.
Previous returns don't guarantee future results, but there are ways for people educated in even simple market timing strategies to outperform the Buy and Holders. The problem comes more from the emotional swings that come with investing. Even though we have these basic signals, investors will get caught up in the moment and headlines and make poor choices that are not in line with their long-term plans. Having a plan doesn't mean anything if you don't follow it! You must follow your plan and be willing to trust the signals you receive. We tend to suffer from fear and greed and the market is a master at invoking those emotions. While there are much more complex strategies to squeeze a little more out of the market, those plans have more false signals and create more risk. For a basic investing plan you will need to look for patterns (like the ones I have shown here) and choose what works best for you and your investment goals.
These signals can be combined to try to gain a confirmation of one signal through another. They can and should also be combined with a solid understanding of the company's financial standing and position against its competitors. The primary plan for investors should be to buy the strongest companies in their respective industries, that are in a well defined uptrend, and show the highest prospects of risk vs reward.
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