Your 4th paragraph contains a rather bold claim. You give one counter example to buy and hold strategy being good. I imagine no one really thinks buy and hold means to never sell under any circumstance. It seems to me to be more of a philosophy that buying/selling on emotion can be dangerous.
The second to last paragraph seems to me to be quite dangerous. I'd wager it is quite likely a person would see a pattern that really isn't there.
As in anything in life you need to have a strategy, even if you invest only in SPY ETF you still have to have a plan when to buy and when to sell. One interesting idea to start is to look into different trend following strategies. Get the data and back test different scenarios and see what is going to work for you according to your risk management, what draw downs you can tolerate, etc...
Buy and hold will work until it doesn't and a lot of people will be left holding the bag, especially if you need the money at the bottom for medical, retirement, etc...
Just check the Japan’s Nikkei stock index, almost 30 years later people are still waiting and are far far away from the top...
So what you're saying is that if the market starts behaving significantly different than it has throughout history, people will be screwed. How exactly does backtesting help you in this scenario? By definition, basing a strategy off a good backtest is assuming that the market will behave similarly in the future as it has in the past.
People are people, they are greedy, selfish and they scare all the same no mater if it was the tulip or the dot com or the financial bubbles, that's why I am confident in my back tests and that's why I am investing and trading successfully and I am happily waiting for the next bubble to shake things up and present even more opportunities...
If you back tested and you re confident in your analysis, more power to you! I am yet to find a truly diversified portfolio that can generate good returns for me...
My back tests and analysis are showing that I am not OK with buy and hold, because I don't want to stomach 50% draw downs or to wait 15 years for the NASDAQ to bounce back...
I am not that risk tolerant and I might need to sell some of my investments for medical, travel, even early retirement...
That's why I like to buy when the market goes up and sell when it goes down and be cash during crises like the dot com bubble and 2008 financial crisis... you can always buy them back on the way up when the trend changes...
No Sir, you should invest in the stock market according to your own risk tolerance! For me it works perfectly and I am very happy with my own strategy ;-)
The description of your strategy (which sounds identical to momentum trading) is a quintessential very-high-risk-picking-up-pennies-in-front-of-the-steamroller approach.
The second to last paragraph seems to me to be quite dangerous. I'd wager it is quite likely a person would see a pattern that really isn't there.