Your stock market investing strategy, despite what the experts may tell you, does not have to be complicated. The key component is that you in fact have a strategy. For a long time the mantra has been buy and hold. The buy and hold strategy was effective during the last great bull market that began in 1982, however the events of the last year or so have caused some to question the wisdom of buy and hold.

What is buy and hold? Buy and hold is a simple stock market investing strategy whereby you invest into the market, typically into index funds, regularly and simply hold the stocks for a long time period. The theory is that by buying into the stock market at periodic intervals you can get the benefits of dollar cost averaging.

Now there may have been some stock market terms in the last paragraph. Let’s take a look at each of these ideas and see how they figure into your strategy? Dollar cost averaging is merely putting a set amount into the stock market every given period, for instance investing $250 a month. By following the laws of dollar cost averaging, you will buy more shares when the price of stock is low therefore lowering your average cost per share. The benefits of this are simple. Over time you’ll accumulate more shares when the cost is low and fewer when the cost is high.

And index fund is a fund that you can buy into that represents all the companies in the particularly index. For instance if you wanted to enjoy the capital appreciation that is generated when the S&P increases in value, then you need to own the S&P 500. Since there are 500 component companies in the S&P this would be a little tricky without index funds. You would have to buy equal dollar amounts of every single one of the 500 stocks that make up the index. This would result in 1000 trading commissions, one for each buy and sell, which would be ridivulous.

Instead you can purchase an index fund which gives you a small piece of ownership in each. So index funds are a way to capture major movements in the whole market. Therefore they gained in popularity during the last bull market when, over time, stocks went up. But are index funds and dollar cost averaging a sound stock market investing strategy? In bull markets the answer is an most definitely yes. However, in bad markets do these strategies make for a winning investment formula? I’m not so sure.

Let’s say you invest $1,000 in a mythical market. You don’t want to take the risk of buying an individual stock issue so you buy an index fund for safety. And let’s say you want to buy and hold until you retire. Does this make sense?

Maybe, maybe not. A stock market investing strategy must be something that you are comfortable with so I can not recommend any course of action specifically. However, let’s look at the numbers for this mythical stock market. Let’s say you want to retire in 20 years and that’s when you plan on selling. And let’s say that you can get an average of 4% in a perfectly safe investment like a CD or bond. Does it make sense to invest in a buy and hold strategy?

Well, assuming, and this a big assumption, that your return averages 10% during a bull market but loses 50% in a single year. Would you then want to buy and hold? Perhaps, perhaps not. In the above stock market investing strategy, with your fund returning 10% a year for the first 19 years, your investment would equal $6115 after 19 years. But then, on the 20th year, your investment would drop by 50%. That would leave your investment total at $3057.50. Which is a little under 6% a year. Which, while not going to make you rich, will be better than you can expect to receive in a bank or bond.

But so the buy and hold strategy may not make you rich. But it may result in a capital appreciation for you.