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By Jason Stipp | 08-31-2010 05:34 PM

Is 'Buy and Hold' Really Broken?

'Buy and hold' doesn't mean never sell, rebalance, or reallocate, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. The concept of buy-and-hold; is it outdated, out of touch, or simply misunderstood? Here with me to offer her take is Morningstar's Christine Benz, director of personal finance for Morningstar.com.

Christine, thanks for joining me.

Christine Benz: Jason, nice to be here.

Stipp: After the big market downturn that we saw in 2008, we've been hearing a lot of folks saying, buy-and-hold is dead. It's not a strategy you can follow anymore. It didn't work for investors. We have to rethink how we plan our portfolios. My first question to you: is buy-and-hold dead?

Benz: Well, I don't think so, Jason, and I do think as you and I have discussed in the past, it's a little bit of a straw man argument to suggest that anyone was saying, buy S&P 500 funds, and then just batten down the hatches for the next 10 years. Never add any money, never rebalance. Really no one was suggesting that.

Instead a better strategy would have been to dollar-cost average, so you'd be sure you'd be putting some money to work on the dips; rebalance, so you'd be periodically getting your asset allocations back into whack; and then also for everyone as we grow older, it makes sense to put more money into safe assets like bonds and cash. And so I don't think anyone was ever saying that an all-stock portfolio, a buy-and-hold stock portfolio was right for people.

Stipp: So just because the word "sell" isn't in part of the "buy-and-hold" term, it doesn't necessarily mean that you wouldn't be repositioning your portfolio and changing things around.

So I think one of the key points there is that as you grow older, naturally, the composition of your portfolio you're going to want to change, and that may involve making some sales or redirecting money as you're putting more money into your portfolio.

How do you know, though, over time how your portfolio should adjust? How should you become more conservative as you're growing more toward retirement?

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