Get Over Your Stock Market Commitment Issues

Are you an investor, or are you a speculator?

These days, that's the first thing John Bogle asks those seeking his investment advice. The founder of the Vanguard Group, the inventor of the index mutual fund, and one of Fortune's four "investing giants" of the 20th century then goes on to explain the difference:

• Speculators place bets on price.
• Investors buy businesses.

So 'fess up: Feeling a bit speculative lately?

How's Your Timing?

It's easy to get wrapped up in the day-to-day gyrations of the stock market. Because of all those ups and downs, the buy-and-hold strategy is getting a lot of flack, particularly among those who bought and now hold investments priced at a fraction of their original worth.

But before you cash in your chips altogether and write off the buy-and-hold M.O., consider the only other alternate strategy out there -- market timing.

Market timing is simply speculating on short-term market movements, trying to time your purchases by buying at the bottom when prices are cheap, selling at the peak, and taking a profit. Then doing it all over again, ad infinitum.

You want to know how well has that strategy works in real life? Paint me unimpressed.

Market Timing v. Buy and Hold

A 2005 study, "A Comparison and Evaluation of Market Timing Strategies," found that before transaction costs and taxes, all but one of the strategies studied beat a buy-and-hold strategy. Just barely.

The single market-timing strategy that beat the buy-and-hold approach won out by -- wait for it -- 0.2%. That's it. A zero-point-something-percent advantage in exchange for being shackled to the computer and CNBC 24-7.

If you're still not sold on buy-and-hold, allow me to present a more appealing alternative.

A Better Strategy: Buy TO Hold

Too many people interpret "buy and hold" as "buy-and-hold-on-no-matter-what" -- the kind of thinking that leads to holding on to the losers in your portfolio for way too long.

To clear things up, consider this slight variation on the original: Buy TO hold.

Buy to hold better reflects the true intention of the founding fathers of long-term investing. When you buy to hold, you commit to sticking it out for as long as it takes your investing thesis to fully play out. Hopefully, that's at least three or five years, or longer. Anything less tends to lead to ulcers and underperformance (particularly when you factor in taxes and trading costs).

However, if something happens to upend your original investing thesis, bought-and-sold is the way to go.

The key, of course, is that you must have an investment thesis to begin with. Without one, you're just speculating -- driving along a dark winding road with no headlights.

Know When to Fold 'Em

While your aim should be to sell as rarely as possible, sometimes sell you must. The buy-to-hold investor's sell criteria is not based solely on what the overall market is doing at any point in time. It's much more personal than that -- it's all about each company in your portfolio.

You want to keep an eye out for game-changing events -- things that wipe out a company's competitive advantage or stress out a company's underlying financials beyond repair. Such events happen in good times and bad. Perhaps a failed drug trial halves a pharmaceutical company's share price, or a rumor about a new technology drives up a company's share price to unsustainable heights. (See why you can't just base your decisions on the overall market?)

Ultimately, buy-to-hold simply means finding great businesses you want to stick with for a while, and checking in regularly to revisit your investment thesis or rebalance.

Fool.com writer Dayana Yochim has no fear of commitment – at least in her portfolio.