The Power of Buy and Hold

When speaking with clients, there is a common perception that the market can and should be "timed." While dollar-cost averaging is a wise long-term strategy, unsystematic timing of the market will only cause you to miss the big up days that provide a bulk of returns in the first place. The article below from the Motley Fool illustrates this point nicely. The author calls a 5-standard deviation move "5-sigma." Quick statistics refresher: A 2-standard deviation move covers 95% of all observations in a normal distribution.

In a standard normal distribution, an event that occurs five standard deviations or more from the mean has about a 1 in 3,488,555 chance in happening -- fairly unlikely, in other words. Yet plenty of stocks have seen more than their fair share of these lightning strikes.

Over the past 56 years, the S&P 500 has seen 52 days with 5-sigma or greater movement, and three days in 1987 with changes that were 10-sigma or greater. Over the past five years, if you had invested in the S&P and held on to it, you would've seen a 23% return, or roughly 4% annually, not exactly something to get excited about. But if, instead of holding, you were jumping in and out and managed to miss the eight 5-sigma days (two of which were negative) over that time frame, then your annual return is slashed to 1%, a certifiably terrible performance.

Read the whole thing:

http://www.fool.com/Server/printarticle.aspx?file=/news/commentary/2006/commentary06110931.htm