When it comes to investment strategy, the mantra of buy and hold has been a prevailing principle of success for decades. Looking at investment indexes can sometimes support this theory that if you own “the market” long enough that you can have investment growth that outpaces inflation after taxes. The question becomes, does a strategy of passivity, or “buy and forget about it”, actually work for investors? Unfortunately, the answer appears to be a resounding — “no”. Well then, why?

A recent study by Dalbar, Inc., a third-party evaluator of the financial services industry that has been tracking investor behavior since 1976, gives us some insight. The underlying reasons seem to be that investors, often self-directed, are impatient and irrational. The Dalbar study (PDF needed) concluded that investors grow impatient during market uncertainty. They measured this impatience by looking at the average time that investments were held.

According to the study, the average holding period for equity funds is a bit over three years; fixed income holding periods were a fraction less. Even for the most patient self-directed investors, they didn’t hold their investments past six years. This is a problem.

“After the market dip of 2000-2002, equity fund investors began to heed advice to focus on the future (Read: they held their investments). Until, of course, their patience was tested once again by the 2008 debacle.

Fixed income investors seemed most comfortable during uncertain markets as they fled equities in search of safer refuge. Asset allocation fund investors have historically held on to their funds for the longest periods of time; however, holding periods have never reached even a brief six years.”

A popular theory says it’s not ‘timing the market’ but ‘time in the market’. While ultimately that may be sound advice for passive investors, most aren’t disciplined enough to abide by it. If you jump in and out of the market because of a lack of patience, your returns will often be a fraction of what the market returns, robbing you of the longer-term benefits of investing.

The Dalbar study also concluded that most long-term, passive investors are fickle about holding their investments. When retail investors are worried about their investments in equity (stocks), bonds, and asset allocation funds, they move their money. Often times, investor’s sell at the worst time, at the bottom of an investment cycle and generally will buy in times when news is positive. In other words, they irrationally buy high and sell low.

So, what does all this mean? What can we learn from how investors have behaved over the last several decades? First, I think the study informs us that very few investors actually practice the time-honored theory of buy and hold. It also gives us insight into what types of economic climates foster the most movement amongst investors.

Taking an active role in one’s investment plan can be of benefit, but only when that activity is coordinated with a disciplined investing methodology. Plenty of very successful investment mangers actively manage portfolios effectively. However, their success is grounded in a repeatable and disciplined process. You must have a plan and an executable system to implement that plan.

If you decide that a hands-off approach is best for you, ensure that your initial asset allocation investment strategy is appropriate for your risk tolerance and then commit to it, even in rocky times. If not, you’re doomed to become a part of the statistics in this study and your performance will ultimately suffer. If you find that you can’t handle the volatility inherent with market swings, then revisit your initial plan or consult a professional. There is more than one way to be successful in the market, but irrational and impatient behavior won’t work, no matter the strategy.