Buy and Hold Isn't Dead. It's Just Wounded

Back in October, in the midst of the market panic, I wrote a series of articles that encouraged readers to stop and think, to take a moment to acquire a little perspective before frantically dumping their stock portfolios. The key point of all of those articles could be summed up as: Don't panic. Panic is expensive.

It's amazing how panic leads people to make exactly the wrong decisions.

Do you really want to buy high and sell low?
Panicked people buy good stocks high because they're afraid of missing the boat, and sell them low to cut their losses. Panic-prone people jump on trends too late and buy "hot tips" from some guy their Uncle Charlie met in a bar, all without doing any research.

And when they do do something that's arguably right, like buying big-name stocks like Amazon.com (Nasdaq: AMZN) at $40 in the middle of a market meltdown, they screw it up by selling -- yep, in a panic -- when it hits $35 a few days later.

Panicked investors, in other words, are those who react to events -- specifically, to their emotions about events -- instead of following a plan. They're the essence of the stereotypical "retail investors" that Wall Street brokers claim can't manage their own money.

What they do, in other words, is fail to buy low and sell high -- or put another way, to buy well and hold for the long term.

So, about that "buy and hold" thing …
For years (and years and years), the best advice for long-term investing success was "buy and hold," maybe even "buy and hold forever." Fool co-founder Tom Gardner recently cited the example of Shelby Davis, who turned $50,000 into $900 million over 50 years by buying good companies he knew well -- mostly insurance companies like American International Group (NYSE: AIG) -- and holding them for decades.

Davis is relatively famous, but any wealth manager who deals with "old money" families can cite dozens of other smaller-scale examples. I know of a few myself -- folks whose great-grandads made a bit of money and bought stocks like General Electric (NYSE: GE), Bank of New York (NYSE: BK), or Consolidated Edison, solid dividend-paying companies, and built fortunes by holding (and reinvesting those dividends) for many years.

Tom Gardner has argued that if you can't refrain from making any trades while watching your portfolio take huge dips, or hang on through several years of no gains, or discipline yourself to do serious fundamental research and keep investing through good and bad markets, a long-term buy-and-hold approach isn't for you.

There's a lot to be said for Tom's argument. But I'm going to go out on a limb and quibble with one of the Founding Fools: I say that buy-and-hold alone isn't for you.

Buy and hold, but better
If there's one thing we humans do well, it's adapt to circumstances. Here we are in a time of great volatility and uncertainty. How do we adapt "buy and hold" to a time of uncertainty and volatility? How do we work around our own inclination to panic?

Here's what I'm thinking (and what I've been doing). We could start with a core of solid long-haul stocks -- great (big) companies like Procter & Gamble (NYSE: PG), BP (NYSE: BP), or Johnson & Johnson (NYSE: JNJ). We could add some smaller growth stocks -- again, with the intention of holding them as long as that makes sense, but with the understanding that these won't necessarily be decade-plus holdings like a blue chip might be. Of course, we'll reserve the right to sell any of our holdings if and when that seems warranted.

But what if we also sold some stocks short, or used options to take short positions (for instance, in an IRA where shorting is prohibited)? What if we used ETFs to take long or short positions on sectors or regions of the world? What if we used options or ETFs to hedge our risks when we went out on a limb, or to protect against a sudden market swing?

In other words, what if we put the volatility to work for us? I can't think of a better way to keep from making panicky blunders than by having a plan to profit from (or at least mitigate the damage from) big market swings.

And what if we put together a community of like-minded folks, together with some experts in these alternative strategies, so that we could learn how to do all this (and profit) together?

Such a community exists -- Motley Fool Pro. You may not have heard of this Fool service because it has been closed to new members for several months. Pro was started right in the middle of last fall's market collapse to find a way to navigate these new market waters, using all of the strategies I mentioned above.

How is it working? So far it's beating the market by over 5% -- with a $1 million real-money portfolio. And it has provided one heck of an education for its members, even for guys like me who've been around the block a time or two.