tactical trader

The most common stock market strategy used by public investors is ‘buy and hold’. This means they buy stocks and seldom, if ever, sell those shares. Buy and hold has generally been successful over the long term, as the markets have trended steadily higher. But, is ‘buy and hold’ still a good choice for individual investors?

The debacle of the early 2000s caused some investors to abandon their buy and hold approach, but many still cling to their old ways. Others are searching for less risky investment opportunities. The purpose of this article is to demonstrate how to modify the buy and hold strategy. The modification accomplishes two good things for your portfolio: You will earn a profit more often and you gain some protection in the event of a market decline. The strategy is built on the same foundation as a traditional buy and hold - the necessity of carefully researching and selecting stocks to buy. To gain the advantages of the modified strategy, you must give up the chance of making a bonanza on your holdings, and aim instead, for steady growth over time.

Because you are investing in the stock market, the most important factor in determining your success is to avoid buying stocks that undergo severe price declines. It’s necessary to do your homework and to have confidence in those companies whose shares you own. With the modified strategy, you earn good money even if your stocks don’t rise in value, as long as you avoid debacles. After you buy your stock, change the way you think about the investment. Consider making a deal with someone else – a deal, in which you offer to sell your stock for a limited time at a predetermined price. In return for entering into that agreement, you receive a cash payment (premium). You get to keep that cash, regardless of whether the other person ever buys your stock.

The situation just described is called ‘covered call writing’. You may have heard that options are only for speculators, but that is a major misconception. Options can be used as very conservative investment tools, and the strategy described here is among the most conservative (for example, in the United States, it’s the only options strategy allowed in a retirement account). Reasonable questions are: You spent time and effort researching a stock to buy, so should you be making arrangements to sell those shares so soon? Is this really a good idea? Let’s consider the answers…