The stock markets hit all-time highs on a seemingly daily basis.  Investors are puffing out their chests proclaiming they’re not only buying and holding but adding to their equity positions by buying the dips.

It’s easy to buy and hold in an up market.  The question is . . . how many investors will stick with a buy and hold strategy should equity markets fall?

If history is a guide the answer will be few.  The impact?  Investors will have fallen into the classic buy high and sell low trap.

How does this happen?

Some who now think of themselves as buy and hold investors will be quick to sell at the first sign of turbulence.  These investors then tend to hold cash far too long and don’t reinvest until prices are relatively high again.

Others (and perhaps most) wait until the perceived certainty of a downturn before giving up on buying and holding to become market timers.

Regardless of being quick on the draw or waiting for “confirmation” a clear outcome is that market timing becomes progressively more popular the steeper the selloff.

The evidence?  The Hulbert Financial Digest tracked several hundred market timers during the 2007 – 2009 bear market.  Roughly 94% outperformed a buy a hold approach.  Unsurprisingly buy and hold investors were scarce.

Conversely market timing becomes progressively unpopular during bull markets as multiyear trends tend to reward buy and hold with outperformance.  Market timers disappear during up markets as most investors claim to follow buy and hold strategies.

The same Hulbert Financial Digest research shows that since the bottom of the equity markets (March 2009) 98% of market timers have underperformed a buy and hold approach.

An implication of this behavior is that market timing’s popularity will bottom out around the time equity markets peak.  Virtually all studies have found that the vast majority of market timers lag buy and hold strategies over full market cycles.  Numbers don’t lie!

Unfortunately many investors are driven by emotion rather than statistics.  It takes courage and discipline to follow a buy and hold approach at the bottom of bear markets when, by definition, doom and gloom feelings are at their worst.

What’s to be done about it now?  A reality check.

Now is the time to engage in honest soul-searching.  Investors who don’t truly have courage and discipline should reduce equity exposure to a level at which they’d be comfortable sticking with during a sharp selloff.  There’s no shame in being honest and admitting a lack of intestinal fortitude for staying fully invested.  Most who claim they have it are kidding themselves and would never be comfortable with such selloffs in the S&P 500 as 49.1% (during the 2000 – 2002 bear market) or 56.8% (during the 2007-2009 bear market).

Try and try as most investors will they can never deceive the Man in the Glass.