I'm a strong advocate of dollar-cost averaging regardless of what the market it doing on a given day. Knowing that realized losses (whether only as reported on a statement or because of a panic sale) carry much more emotional weight than foregone gains, a DCA approach provides a much better Sleep-Factor Answer. That comfort level promotes long-term investing.

As you know from my earlier comments, I do not buy into this premise.

It is of course so that we do not know where the market is headed if we fail to take price into consideration when setting our stock allocations (Passive Investing). If we are willing to take price into consideration (Rational Investing), long-term returns are highly predictable (the historical data shows that the return obtained at 20 years is 78 percent predictable for those willing to look at the P/E10 value that applies on the day the stock purchase is made).

So my answer is — if stocks were selling at a price at which a good long-term result was a high probability, I would put the money into stocks immediately. But if stocks were selling at a price at which a good long-term result was a low probability, I would put the money into something where it would hold its value until stocks were again selling at a price at which a good long-term result was a high probability.

I very much agree that the “hold” part is the hard part of a buy-and-hold strategy. I do not think it is possible for buy-and-hold to work for Passive Investors (investors who refuse to change their allocations in response to big price changes). The problem is that investors can never possess inner confidence in a strategy that requires that they ignore price. We all know from buying thousands of things other than stocks that price matters and it is impossible for us to believe on a deep level that this common-sense rule does not apply with purchases of stocks too.

However, I do think that buy-and-hold can work for valuation-informed investors. There are times when market prices are irrational. Those times can go on for 10 years or even a bit longer than that (stocks were selling at insanely inflated prices from January 1996 through September 2008). But so long as the investor understands the effect that valuations have always had on long-term returns, he knows that these periods of irrationality are a temporary phenomenon.

Passive Investors were shocked by the price crash. Rational Investors saw it coming back in 1996. Price crashes do not cause emotional stress for those who understand what causes them and who protect themselves by making the necessary adjustments to their stock allocations.

Rob