Some investors may not see buy-and-hold investing as a good way to prosper in the stock market.

Despite this strategy being practised by many financial advisors and investment gurus such as Warren Buffett and Marty Whitman, some investors and business media still have concerns. Their numbers tend to increase in times of crisis or market meltdown, such as the situation we’re now in.

Market collapses, like the one we're experiencing, are horrifying for investors, particularly for those in or near retirement. And critics of the practice say this is precisely what makes buy-and-hold investing dangerous.

These detractors argue that buy-and-hold is reckless, harmful and perpetuated by the industry’s own aspirations of endless growth.

For example, the S&P/TSX Composite Index on January 2, 2008 was at 13,927. By October 31, 2008, it had sunk to 9,763. The critics argue that if you had invested in the index fund in January and rode the white-knuckle slide down (buy-and-hold) your investment loss would be about 30%. Therefore, it hardly seems worth the emotional and financial pain.

However, the short-term view isn’t the right way to evaluate buy-and-hold investing. Wealth creation happens over time, not overnight. And buy-and-hold investing is best measured over the long term.

You also need to invest in quality investments – companies in long-term growth industries that are well managed and financially sound. That doesn’t guarantee these companies won’t get caught up in a market meltdown, but it provides some assurance that they have the ability to weather the storm and come back once the crisis ends.

To illustrate this point, here’s a question for you. Is it possible to turn a profit with a mutual fund that is $10 at the beginning of the year, drops 70% over the next seven months and then, over the next 17 months, climbs back up in value and ends the following year at $9?

Yes you can.

The key with buy-and-hold investing is having a monthly Pre-Authorized Chequing (PAC) plan, and how you react to fund price fluctuations. By making regular monthly investments, regardless of the price, you could be ahead. Here’s how:

Investor Bob is invested in mutual fund XYZ. As of January, he owned 1,000 units at $10. This made the market value of his investment $10,000. He also had a PAC plan set up which invested $200 each month in XYZ fund. Bob did a lot of research into his investment and was happy with the fund’s manager and the quality of holdings in which his fund is invested.

Later in January, Bob is warned of a pending economic crisis that will affect the markets around the world. By February, Bob’s XYZ fund is down $2. Bob isn’t worried though, and is confident his investment will be fine.

However, as the year drags on, the economic crisis gets worse and Bob’s XYZ fund continues to fall. By June, Bob’s XYZ fund had fallen to $4, a whopping 60% drop from January.

Bob is very upset now and is nervous that his portfolio will keep falling to zero. He arranges a meeting with his financial advisor. His financial advisor tries to reassure Bob that he made a wise investment choice in the beginning, and nothing has really changed in his XYZ fund except for the market meltdown. He tells Bob that things will turn around, and to keep his PAC plan going. Eventually, things will get better.

The next month, however, Bob’s XYZ fund dropped further. Trading at $3, it’s down 70% from January. Bob is even more nervous as his investment, which was worth $10,000 in January, is now worth under $3,800 (down almost 67%), including the $1,400 he’s invested since January with his PAC plan, but he remembers what his advisor told him and hopes things will turn soon.

Sure enough things do. In August, his XYZ fund jumps to $3.50. And, over the following months, Bob’s XYZ fund starts climbing back up in value, and ends the year at $4.75.

While the Fund is down 50% over this 12-month period, Bob’s portfolio faired slightly better and was down 42%.

The following year, Bob continued his $200 monthly PAC plan in XYZ fund. Over this next 12 month period, XYZ fund continued to slowly rebound and went from $5 in January to $9 in December.

Now, you’re probably wondering, Bob couldn’t have made any money because his fund was still down $1 from where he started two years ago. But, in fact, Bob’s investment was up almost 14%.

Here’s how:

Through Bob’s PAC plan, he invested $4,800 over 24 months. Because he bought units of XYZ fund throughout the year (buying more units with his $200 as the price dropped), he was able to earn a decent gain, despite the fact that the fund was still down $1 from the beginning of the two-year period.

If Bob had invested the complete $4,800 at the start of the year, say at the fund’s peak in January, he would have actually ended the two-year period down 10%.

Bob’s PAC plan

Dollar cost averaging is one of the best ways to invest

This technique is called dollar cost averaging, and can be done through the use of a PAC plan.

Dollar cost averaging is investing the same amount weekly or monthly. Because fund unit prices fluctuate, you always buy more units when markets are low. When markets are high, you buy fewer. It’s like waiting for sales.

By following this strategy, you can often lower the average cost of your investments. If you have lower costs coming in, you’ll have more profit going out (see table below).

There are a number of advantages to dollar cost averaging through a PAC plan.

• Don’t have to guess when to buy
• Convenience
• Don’t have to invest large amounts all at once; smaller amounts are easier to work into your budget.
• No need to study trends or be a market expert.

Most importantly, dollar cost averaging eliminates the temptation to buy wildly when the price is increasing, and stop buying when the price is going down.

Talk to your financial advisor today about dollar cost averaging through a PAC plan, or call AIC Client Services at 1-800-263-2144.

Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. The AIC Logo and BUY. HOLD. AND PROSPER, are registered trade marks of AIC Global Holdings Inc. Used under license by AIC Limited

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