"Set It and Forget It" Investing

Ever find yourself awake at 3 a.m., watching television to try to fall back asleep? If so, you've probably ended up watching infomercials. One favorite showcases a rotisserie chicken oven, with which aspiring chefs were urged to "set it and forget it." There's just something appealing about putting a piece of meat into a small oven and returning hours later to find it fully cooked and ready to eat. Not surprisingly, people like to reap rewards without exerting a lot of effort.

The same holds true for investing. While there are some day traders who get a rush from the minute-by-minute rise and fall of the market, Foolish investors are long-term thinkers. They prefer to find promising companies and hold onto them until they pay off, rather than constantly trading based on the latest hot stock tip.

That's a trend that became increasingly popular among investors during the now-ended bull market, as they put the "set it and forget it" mind-set into practice in their portfolios. But now, people wonder if buy-and-hold can still work as an investment philosophy.

Learning from experience
Apparently, during the bull market rally, investors favored mutual funds over individual stocks. Market experts have theorized that although average investors participated in the rally, they were cautious coming out of the bear market of 2000-02. With fears of a repeat performance -- fears that turned out to be true -- investors viewed mutual funds as a way to diversify risk. They shoveled hundreds of millions of dollars into funds rather than individual stock positions.

Also, not surprisingly, investors loaded up on top sectors, such as companies that deal with commodities. Consider how well these commodity stocks did in the five years ended in June 2008:

Source: Yahoo! Finance. Returns from June 30, 2003, to June 30, 2008.

Yet over the ensuing nine months, those stocks all lost at least half their value -- with the exception of BHP Billiton, which managed to lose "only" 46%. And although most of those stocks have recovered during the rally since March, none has recovered all of its losses since 2008.

Behind the data
What all of this tells us is that although investors can learn from past mistakes, they also have very short memories. On the one hand, we find news that investors are favoring funds over stocks encouraging. We think this makes sense for most individual investors. Everyone thinks they have the edge when it comes to picking which stocks will outperform in the next few months or years.

But even the Wall Street professionals have trouble getting their picks right all the time, and they do this for a living. They have resources and information available to them that most of us can only dream of. So why do so many of us still think we can outguess the professionals?

Save yourself some time, money, and worry, and don't try to go it alone in the investment game. Instead of trying to pick stocks on your own, hire someone with the know-how to do it for you. Mutual funds can be your best friend if you can find some of the decent funds out there with a long-tenured management team, a consistent investment process, and a positive track record.

However, investors traditionally pick fund sectors at their highs. Sure, long-term investors should always own some stocks that produce commodities. But if you increased your exposure to the commodities sector purely in response to the incredible returns this area experienced during the bull market, then you got hurt badly. With lofty valuations, those stocks had nowhere to go but down when the U.S. hit its rough patch. Don't chase returns -- it's that simple.

But now, the converse is also true. Just because returns were terrible last year doesn't mean you should abandon funds entirely. You can still benefit from a disciplined investment approach. Buy-and-hold is far from dead.

Portfolio on autopilot
So if you're like the studio audience in that rotisserie oven infomercial and the concept of "set it and forget it" is appealing, mutual funds may be ideal for you. Pick your funds, and let your managers worry about the rest. Although it won't make losses easier to take, you'll be able to ride them out and prosper in the long run.

And no matter what else happens, the odds are good that you'll get more benefit from owning high-quality funds than you'll ever get out of that rotisserie oven.

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This article, written by Amanda Kish, was published on June 14, 2007. It has been updated by Dan Caplinger, who owns shares of Freeport-McMoRan and Chesapeake Energy. The Fool owns shares of Chesapeake Energy, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.