I sold all my stocks just before the 1987 crash. But the aftermath taught me a valuable lesson: Long-term investors should buy and hold stocks -- not try to time the market. By Steven Goldberg, Contributing Columnist October 16, 2007 In my early years as an investor, I was a market timer. From 1982 to 1989, I studied newsletters from Marty Zweig and Dick Fabian, and religiously dialed their telephone hotlines, convinced that they could help me avoid a big bear market, such as the 1973-74 disaster, when stocks lost nearly half their value.All that work paid off -- or so it seemed at the time -- when the market crashed in October 1987. After soaring more than 250% from August 1982 to August 1987, stocks went into free-fall. The Dow Jones industrial average plunged nearly 4% on October 15 and 4.6% on October 16. I sold out on the 15th. Until then all my money -- including my 18-year-old stepson's college money -- had been in a very risky fund, Twentieth Century (now American Century) Ultra. The Dow plummeted 22.6% on October 19, the largest one-day decline ever and a record that still stands. From the market's peak that summer, almost half of its gains since 1982 had been wiped out by the day's close. At the time, I thought the crash might usher in a depression, just as the 1929 crash had signaled the onset of the Great Depression. As it turned out, I was the fool. The market quickly regained its footing, regaining all of its loss in about 1½ years. Meanwhile, I dithered on the sidelines with my newsletters. For all my work, I didn't do any better than I would have had I just sat tight in stocks. Since then, I've been a buy-and-hold stock investor -- albeit a better diversified one. Advertisement Lesson learned Of course, the 1987 crash was unusual in that the recovery was rapid. The market lost 86% of its value from 1929 to 1932. If you had invested at the peak, you wouldn't have broken even until July 1944. More recently, the market lost nearly half its value in the 2000-2002 bear market -- and only made new highs this year. If someone could predict when those really big bad markets would occur with enough accuracy to beat buy-and-hold investing, I'd sign up tomorrow. But there's no evidence anyone can. Mark Hulbert's outstanding work tracking hundreds of investment newsletters for the Hulbert Financial Digest since 1980 shows that the ability of their editors to time the market are, in aggregate, about what you'd expect if you simply flipped coins to decide whether or not to buy and sell. The research that pours into my inbox every day from highly paid market strategists is no more accurate. Sure, some people are better than others at crystal-ball gazing. Steve Leuthold has a good record. Dan Fuss and Kathleen Gaffney, the two senior managers of Loomis Sayles Bond, also seem to offer good glimpses of what's going to happen next. I write about them regularly. Advertisement But here's the bottom line. Common sense tells you that the bigger something is and the more moving parts it has, the harder it is to predict. That means it's easier to forecast the fortunes of a company than of an industry, and easier to forecast how an industry will do than how the whole market will do. Not that any of it is easy. My niche is predicting which mutual funds will do well, and after 25 years at it, I still make plenty of mistakes. I don't ignore what's going on in market sectors, or even the whole market. I think it's fine to put more of your long-term money into parts of the market that seem a bargain. Right now, that's stocks of large, growing companies. And I don't think it's dumb to cut back 10% or so on your stock allocation when someone as good as Leuthold turns bearish -- as he did recently. That's just hedging your bets. Advertisement But bailing out of the market because you or some expert thinks it will fall is folly. What's worse, those who sell are likely to lose out on the big gains the market makes over the long haul. The key to success in long-term investing is time in the market, not timing the market. Why buy and hold works The long-term data is clear. Since 1926, the stock market has returned an annualized 10.4%, according to Ibbotson Associates, a unit of Morningstar. Bonds, meanwhile, have returned 5.4% annualized and "safe" Treasury bills have made 3.7%. Inflation, meanwhile, has averaged 3%. Of course, stocks are risky short term. You can expect a bear market -- a loss of 20% or more -- every four years or so. That's why short-term money, such as my then-teenage stepson's college money, had no business being in stocks back in 1987. But over five-year periods, stocks have lost money just 10% of the time. Stocks have beaten bonds and cash in about 80% of all rolling five-year periods. And stocks have beaten bonds and cash in all rolling 20-year periods since 1926. (By rolling periods, I mean those starting with January 1926, then February 1926 and so on.) The future may not resemble the past. But the odds are that it will. That's why your long-term money belongs in stocks -- bear markets and crashes notwithstanding. Steven T. Goldberg (bio) is an investment adviser and freelance writer.