Too many investors have been advised that a policy of buy and hold is the best way to invest for the long run. The advice is typically: “Just buy a good stock and hold on as long as you can. The market will take care of you.” Well, the stock market has not been taking care of investors for quite a few years now. Instead, the market is taking stock investors on a wild stomach-churning ride—and there is no telling where it will end. Investors are getting sick along the way and are unsure that there will be anything left when the ride is over.

Buy and hold is failing as an exit strategy because it encourages a wait-and-hope outlook among investors and does nothing to provide badly needed control of gains and losses. Buy and hold may not be dead as an exit strategy, but if it’s not dead, it should be on its way to a better life somewhere far from these volatile markets.

Back in the late 1960s, I was a young commodity broker at E. F. Hutton and Co. Our office was a brand-new high-tech office (for its time) that was considered the "flagship office" for E.F. Hutton.

In this office about 30 brokers and as many clients shared one very large boardroom, and there were no private offices. The brokers had elegant and expensive desks, and the clients had a comfortable seating area in the front of the office where they could hang out and watch the tapes and monitor our state of the art commodity "clacker board."

Sitting at my desk near the front of the boardroom, I could read my Wall Street Journal and keep track of the commodity markets without looking at the board. By just listening to the rhythm and tempo of the mechanical clicks as the prices changed, I could easily tell when anything important was going on, because the tempo of the clicks would increase noticeably.

A very comprehensive study of the Dow Jones Industrials caught my eye recently and I want to share some thoughts and conclusions based on the data in the study. The data I will be referring to is from a study encompassing more than 100 years of daily data on the Dow Jones Industrial Average (Black Swans and Market Timing: How Not To Generate Alpha, by Javier Estrada, International Graduate School of Management, Barcelona, Spain). The data presented in this study begins on December 31, 1899 and ends on December 31, 2006. In total, the study encompasses 29,190 trading days. I have highlighted the data about avoiding the worst days, since it’s usually ignored:

• 1) A $100 investment at the beginning of 1900 turned into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%.
• 2) Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%. But avoiding the worst 10 days increased the terminal wealth by 206% to $78,781, and the mean annual compound return by more than one percentage point to 6.4%.
• 3) Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%. But avoiding the worst 20 days increased the terminal wealth by 531.5% to $162,588, and the mean annual compound return to 7.2%.
• 4) Missing the best 100 days reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and reduced the mean annual compound return to −0.2%. But avoiding the worst 100 days increased the terminal wealth by a staggering 43,396.8% to $11,198,734, and more than doubled the mean annual compound return to 11.5%.