04/24/2014 06:49 pm ET Updated Jun 24, 2014

9 Reasons to Quit Buy-and-Hold Now!

The bull market is overextended.
This is the second longest bull market in the last 80 years and the third longest in the last 100 years.

Stocks are more expensive today than 91 percent of all of market history.
Stocks are near their all-time highs. In fact, on a price-to-earnings basis, they have rarely been more expensive. When were they more expensive? 1929, 1999 and 2007.

The key to being a successful investor is NOT about how much you make in bull markets, it's about how much you preserve in bear markets.
Understand that it takes a 50 percent loss requires a 100 percent gain to break even. This chart gives a clear illustration of the exponential relationship between a percent loss and the gain required for a full recovery.

Fed-Induced Speculation Does Not Create Wealth.
Famous investor John Hussman recently published a comprehensive analysis of what he calls a fed-induced bubble in asset prices and that "the consequences have been deferred, not avoided, by faith in the Fed."

The "stocks for the long run" mantra is flat wrong.
Stock market volatility in the future is likely to be higher than it was in the past (video). The technical paper is here.

Investing "experts" don't follow their own advice (i.e. John Bolge, Harry Markowitz, Burton Malkiel). Wall Street Journal contributor Jason Zweig exposed this truth in his 2009 article, "Investing Experts Urge 'Do as I Say, Not as I Do."

All G-7 counties have suffered at least one period where stocks lost 75 percent of their value.
The faith that most investors have in stocks is misplaced. Buy-and-hold investors are "all-in" on stocks and bonds and they have no contingency plan. (Click on "Ten Lessons for the Twenty-first Century Investor.")

Retirees should avoid unnecessary risk and have an escape plan.
Most investors don't understand the true nature of risk. Yes, you should be concerned about the probability of negative events but you should also be concerned with the consequences of those events. And be aware of misleading statements from so-called "financial educators."

It's a myth that you should stay fully invested all the time.
For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go or what's going on in the economy. There's just one problem. It's hooey, says Bret Arends of The Wall Street Journal.

So, if buy-and-hold is dangerous, what's an investor to do?

We tell investors to adopt an actively managed portfolio that uses trend-following with the goal of investing in stocks and other asset classes while prices are rising and moving to cash or other defensive assets when they are falling. Even a simple trend following strategy, such as buying stocks when they are above their 200-day moving average and going to cash when they are below it may be able to help you preserve your assets during the next bear market.

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