Alternatives to Buy and Hold Investing

Buy and hold investing is the most popular investing method for individual stock and bond investors due to it’s simplicity, low cost and good long term results.

There are, however, some excellent alternatives to buy and hold investing available to individual investors.

In this post I’ll cover information about these alternatives to buy and hold investing including:

  • Why investors seek buy and hold alternatives so you can see if such a move makes sense
  • The main alternatives to buy and hold investing if you’re looking for one that works for you
  • A very traditional alternative to buy and hold investing that most investors are comfortable using
  • The trend away from buy and hold investing and toward alternatives
  • My favorite buy and hold investing alternative

You might be wondering if I’m a buy and hold investor myself. This is answered in more detail ahead but I blend both buy and hold investing with alternatives, depending on the investment.

Why Use Alternatives to Buy and Hold Investing?

buy and hold investing alternativesWhy would anyone seek alternatives to buy and hold investing given the many benefits of this simple and wildly popular strategy?

Here’s why investors sometimes stray away from buy and hold investing strategies toward alternatives.

1. To Increase Returns

Many investors look to alternatives to buy and hold investing in an effort to increase returns. This is because buy and hold investing just feels too easy.

The common belief is that better results can only come from increased effort.

Given this common belief, it feels like you’re settling for mediocre returns when using a strategy as simple as buy and hold investing. This is true even though buy and hold investing usually (but not always!) outperforms other more advanced investing strategies for individual investors.

2. Manage Stock Market Risk

Other investors seek alternatives to buy and hold investing to better manage stock market risk.

In general, buy and hold investors tend to be die hards, just look at the Bogleheads.

Yet inevitably after holding stock investments through those occassional long bear markets just for the sake of being a long term buy and hold investor, investor emotions finally take their toll and lead investors to seek seek alternative strategies aiming to decrease bear market risk.

3. Impatience 

Many times investors simply grow impatient with buy and hold investing. As an investor, I’ll be the first to admit it seems like I “should be doing something” even when I shouldn’t.

The fact is that buy and hold investing requires a great deal of patience. As humans, most of us aren’t known for our patience.

4. “There’s Gold in Them Hills” Mentality

There is a certain allure to pursuing alternatives to buy and hold investing, such as swing trading or rotating asset classes while seeking to capture shorter term profits.

My post Is Buy and Hold Investing the Best Strategy has more about why investors seek alternatives to buy and hold investing but these are 4 of the main reasons alternatives are sought.

Tactical Investing Vs Buy and Hold Investing

Next, let’s look at the lingo for investors who use alternatives to buy and hold strategies so exploring the alternatives makes sense.

If you’re not a passive buy and hold investor, then you’re some type of active investor.

Active investors are frequently called “tactical investors” because they buy investments expected to increase in price and sell assets expected to decrease in price.

Tactical investing is different from more common “strategic investing” which generally follows a buy and hold investing method. Strategic investing holds various assets with the expectation that when one asset falls another will increase, and that, collectively, the portfolio’s value will increase while managing risk along the way. The lingo for this is also risk parity.

A strategic approach is based on buy and hold investing since the goal is long term growth over time with risk management being done by the various assets being held vs buying or selling anything to improve returns.

On the other hand, a tactical investor seeks to earn capital gains when assets are bought and sold, and also manage risk by not owning assets when they are declining. While most alternatives to buy and hold investing are considered risker, tactical investing usually has a heavy focus on risk management by identifying times of high vs low risk and holding only assets appropriate for each environment.

While no one can know if the stock market will go up or down at any exact time, the fact is that many tactical investing strategies have proven to be excellent buy and hold investing alternatives.

After all, even Warren Buffett uses an alternative to buy and hold investing, value investing, even though he promotes passive buy and hold investing for the general public. One reason he does this is because buy and hold investing requires less effort and education than the alternatives, something most investors don’t care to pursue.

So, we’ve covered the lingo for alternatives to buy and hold investing. Next let’s consider the factors that play into these alternatives and then look at eash alternative method using these factors.

Factors for Alternatives to Buy and Hold Investing

There are several different factors that a tactical investor might use in implementing buy and hold investing alternatives.

These factors determine which strategy a tactical investor will apply. Sometimes these factors are combined.

Common factors used for buy and hold alternatives are:

  • Macro factors
  • Valuations which have changed
  • Technical factors which have changed
  • A profit target that has been reached
  • A loss limit that has been reached

Next let’s see how these factors are applied for implementing alternatives to buy and hold investing.

Investing Based on Macro Factors

One popular alternative to buy and hold investing is macro investing.

Buy and hold investing ignores macro factors since it uses a fixed asset allocation while macro investing modifies the assets held when factors that typically affect investment prices change.

Macro investing is growing in popularity as investors become more knowledgeable about macro factors through increased information flow in the media.

Many financial advisors and advanced investors make decisions to buy and sell investments based on macro factors, and have done so for years. In fact, macro investing is an old fashioned investing principle.

Macro factors are generally due to:

  • Global changes
  • Economic changes
  • Market Changes

In this case, the investor will buy assets indicated to do well during the current and impending economic situation. Then investment holdings will be adjusted as changing factors warrant.

For example, an investor may reduce or eliminate bond holdings when interest rates are set to rise since rising interest rates cause bonds with fixed interest rates to fall in price.

Alternatively, a stock investor that considers macro factors may reduce or eliminate stock holdings when the stock market as a whole becomes over valued, or when a recession is warranted.

This is extremely logical yet often considered risky or detrimental to investment returns.

Investing Based on Valuations

Another alternative to buy and hold investing is value investing.

An investor may make decisions to buy or sell investments based on changing valuations.

For example, an investor may decide to sell in an investment that becomes overvalued. Likewise, the investor will buy assets that are selling at low valuations.

This is the old fashioned way investing was done, and is still done by value investors.

Investing based on valuations can be similar to buy and hold investing since valuations often change slowly over time.

Given this, value investing is an alternative to buy and hold investing that feels comfortable to traditional long term investors.

The value investing method is explained in The Intelligent Investor, which made my list of advanced investing books. This timeless classic is a starting point if you’re considering valuation based investing as an alternative to buy and hold investing.

Investing Based on Profits or Losses

Another alternative to buy and hold investing is to make investment timing decisions based on profits and losses.

This can be done for profits, losses, or both.

Investors may sell an investment when a 10% profit goal has been achieved, for example.

Many investors apply loss limits to manage investment risk without upside selling, however. The theory with this approach is to let winners run while limiting losses.

This is a core investing principle that isn’t usually applied to buy and hold investing, leading many investors to seek alternative methods to manage risk better.

Investing in Funds

Widely owned index funds such as SPY simply buy and hold the assets in the index being represented by the fund. There are, however, thousands of funds of all types that implement alternatives to buying and holding investments long term.

One of the easiest ways to implement an alternative to buy and hold investing, then, is through a fund. Just check the historical performance to see if the fund typlically outperforms the related benchmark index after fees; most funds don’t as addressed elsewhere in this post.

Every now and then, however, active fund managers like Peter Lynch or Warren Buffett come along.

Investing Based on Technical Factors

Many investors use technical analysis to drive buy and sell decisions. This advanced investment strategy is an increasingly popular alternative to buy and hold investing as more individual investors become aware of technical strategies through tools such as Allocate Smartly.

Investing based on technical factors can, however, be similar to buy and hold investing if the technical indicators used are very long term.

For example, a 200 day moving average is a technical indicator which moves very slowly since there are roughly only 21 trading days in a single month. As a result, an investor that makes buy and sell decisions based on 200 day moving averages may hold an investment for a very long time.

Are Buy and Hold Alternatives Better?

Study after study shows that actively managed mutual funds perform worse than passive mutual funds. These studies are cited as the reasons every investor should be a buy and hold investor.

There is a huge difference between an individual investor, however, and a fund manager under pressure to adhere to fund policy while investing millions if not billions of dollars. The two simply cannot be compared.

The problem for most individual investors is that emotions get the best of them leading them to buy and sell at the wrong times. Now, however, knowledgeable and disciplined investors can implement buy and hold alternative strategies that perform better than buy and hold methods, based on historical performance data.

Most investors simply don’t know about this, but the information is gradually becoming more known.

There’s also the fact that during bull markets passive strategies tend to outperform active strategies but during bear marekts and economic turmoil, many buy and hold alternative strategies tend to shine.

My Favorite Buy and Hold Investing Alternative

My favorite buy and hold investing alternative is buying and selling assets following a model that incorporates technical analysis. In choosing the model, however, I consider current and likely future macro factors.

This is my favorite alternative to buy and hold investing because technical models can be backtested reliably for up to 50 years. This allows me to see the gains and losses that have occurred during that time frame, and consider the macro factors that were in place at that time.

This data is extremely revealing and valuable.

The strategy I use combines several models developed by some of the top technical model experts in the world. Then I just place the ETF trades in my brokerage account when the system tells me to do so.

Here’s why I like this particular buy and hold alternative. It’s fairly easy after learning how. It’s very low cost relative to using a financial advisor, and has historically beaten a traditional buy and hold stock and bond portfolio with considerably less risk as measured by the historical “drawdown”.

I teach my investment coaching clients why I do this and how to implement and manage such a strategy.

Buy and Hold Investing Alternatives Summary

As you can see, there are several alternatives to buy and hold investing strategies for all different kinds of investors.

These alternative buy and hold investing strategies can be combined, as you have seen. For example, an investor may incorporate technical analysis to improve the timing of buying and selling value based investments.

While buy and hold investing holds many merits, there are many alternatives which more advanced investors can pursue and master.

My investing course helps investors understand the different ways to invest and find the best method for them to reach their financial goals.

The information on this website is for education only and is not to be construed as personal financial advice.