Long-term buy and hold only works if you can predict a long-term bull market -- or so says Bernie Schaeffer, chairman and founder of Schaeffer's Investment Research.

Since stocks of all walks have been torpedoed in the wake of the financial crisis, pundits are calling into question the viability of the decades-old strategy. Long gone may be the times our grandparents and parents were able to invest in stocks for 10-plus years without rebalancing or cleaning their portfolios.

As part of The Motley Fool's series that seeks to answer the question, "Is long-term buy and hold dead?" Schaeffer weighed in. What follows is an edited transcript of our interview.

Jennifer Schonberger: Do you think long-term buy and hold is dead?

Bernie Schaeffer: I don't see it as a viable strategy, unless you have a way of predicting long-term bull markets.

In March 2000, the S&P peaked at more than 15 times its August 1982 lows. On the other hand, anyone who invested in the S&P from the middle of 1997 to date is very likely losing money. So if you believe we're about to embark upon a 1982-to-2000 run, "buy and hold" will work. In a much more challenging environment, such as the one we've experienced over the past dozen years, it will not work.

The lesson here is never to confuse genius with a bull market, and that powerful bull markets make almost any strategy that involves buying stocks look "smart." What's "dead" is the immutable belief that dominated the investment world as recently as a few years ago -- that buying stocks for the "long term" is always a good deal and the idea that a 100% portfolio exposure to stocks makes good sense.

Schonberger: Do major gyrations in stalwart stocks like General Electric (NYSE:GE) call into question the strategy? Are the days of the blue chip over?

Schaeffer: Let's not forget that GE turned out to be a case of financial engineering in blue-chip clothing. There's also the recent transformation of American International Group (NYSE:AIG) and General Motors -- two stalwarts of the Dow Jones Industrial Average of 30 "blue chip" stocks [that turned] into penny stocks. Before that, there was Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) and before that, WorldCom and Enron.

I think the days that a company can remain dominant in the markets for decades at a time are over. Life simply moves too fast these days. There are no "permanent blue chips." Even Wal-Mart (NYSE:WMT), while still dominant in retailing, has been dead money for stock investors for a decade.

Schonberger: What do you say to investors who have implemented the long-term buy and hold strategy for years and have seen their holdings simply evaporate in the wake of the market meltdown? And it could be years before any of it comes back ...

Schaeffer: Always keep a significant portion of your holdings in cash or in bonds -- at least 30%. Stocks are risky investments, even over the "long term." Investors should never be 100% invested in the stock market. ... Asset allocation is critical. There should always be a mixture of stocks, Treasury bonds, and cash.

Schonberger: What about diversification?

Schaeffer: Diversification is overrated and gives investors a false sense of security. In bad times, stocks all move down together and in good times you don't need to be very diversified. One of the biggest jokes on investors over the years has been "diversifying" into many stock mutual funds only to find these funds basically own the same stocks.

Schonberger: Should investors do more active managing now than in the past? For example, if you are going to follow the long-term buy and hold strategy, should you have an exit strategy for the short term in case the bet goes south, maybe fundamentals deteriorate?

Schaeffer: Active managing is only worthwhile if you've got the skills to do this. ... [You should only have an exit strategy] if you're going to figure out ahead of the crowd if fundamentals are deteriorating. If you're the last to figure this out, you'll be selling at the bottom.

Schonberger: How long are we talking about here? How long is the "long" in long-term buy and hold?

Schaeffer: Warren Buffett says "forever," and shares in his company [Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)] dropped by almost 60% from late 2007 to early 2009.

 Schonberger: Is index investing still a viable strategy? How has it evolved? There are indexes for everything today -- not just the S&P and the Dow.

Schaeffer: The pitfalls of "buy and hold" represent exactly the pitfalls of index investing, though index investing does have the advantage of keeping expenses such as transaction costs low.

Schonberger: Are we entering an era where if you buy and hold stocks for the next decade, you earn subpar returns? Is it possible that the upcoming decade mirrors the rather lackluster stock market returns of the 1970s, where you saw a couple runs, but on the whole it wasn't so great?

Schaeffer: This is certainly possible. Returning to the huge returns of 1982 to 2000 is also possible. The only way to play these possibilities is to maintain enough exposure to cash and bonds to sufficiently protect yourself against weak periods in the market, while having enough equity exposure to participate in the big rallies.

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Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Wal-Mart and Berkshire are Inside Value recommendations. Berkshire is also a Stock Advisor selection. The Motley Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.