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Avoiding the 3 Pitfalls of 'Buy & Hold' Investing

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Rumors of the demise of 'buy & hold' investing are greatly exaggerated, to say the least.

Purveyors of market timing would like us to believe that this investment strategy is no longer relevant to the current uncertain environment.

Sentiment remains high, with many expecting the market's strong showing in 2017 to continue into the New Year and beyond. But many individual investors remain hesitant to get back in the fray, with memories of the last market crash making them question their long-held beliefs, including the virtues of 'buy & hold' strategies. This shows up in weak money flows into equity mutual funds, which have yet to fully reverse despite the market's strong recent gains.

But long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it ever has been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of a 'buy & hold' strategy over any other investing approach.

But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:

1) 'Buy & Hold' Doesn't Mean 'Buy & Forget'

Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.

Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well informed of what is going on with each of their holdings.

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2) Don't Fall for the 'Buy What You Know' Mantra

Guard against the simplistic beauty of the 'buy what you know' mantra; another one of those skin-deep lessons learned from Warren Buffett's investment style.

Adherents of this 'philosophy' load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years.

Being familiar with a company's product(s) is a useful, but not necessary, starting point to 'knowing' the stock as an investment opportunity. The decision to buy the company's stock should follow a thorough, due diligence process that gives you a solid appreciation of the company's prospects, competitive position and the proper value of its stock.

In fact, studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks.

3) Stick With a Plan

Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change.

I am not suggesting that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the market.

If you expect a major economic downturn in the coming 12 - 18 months, your choice of investments would be very different from someone looking forward to a goldilocks-type scenario.

And you must stay nimble and flexible enough to adjust your positions should your outlook change.

Putting It All Together

Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. Note that we here at Zacks have been successfully managing an annual 'buy & hold' portfolio for many years. We call it Zacks Top 10 Stocks, a portfolio featuring 10 stocks I personally select and then actively monitor on your behalf. We are about to come out with Zacks Top 10 Stocks for 2018.

We construct this portfolio by first taking a look at the economic and earnings outlook. Then we narrow in on the industries that we believe will outperform and stay away from the others. From there, we use our proprietary Zacks Rank system to help select the best stocks in those favorable groups. Since 1988, this stock-rating tool has more than doubled the S&P 500 with an average gain of +25% per year.

The New Year brings a host of challenges and opportunities for the investing public. But Zacks Top 10 members can rest assured that the stocks we have picked for 2018 fully take into account what lies ahead.

You're invited to be among the first investors to see Zacks Top 10 Stocks for 2018 when they release on Tuesday, January 2. But please note, the best way to tap into this long-term investing opportunity is to get in on the ground floor. These picks are time sensitive and the sooner you invest the more you figure to gain.

Get access to Zacks Top 10 Stocks for 2018 now>>

Happy Investing,

Sheraz Mian

Sheraz Mian is the Director of Research. He determines which valuable data to use to assess winning stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the Editor of Zacks Top 10 Stocks.

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