Markets are up, again.

For now, anyway, the co-ordinated plan for the European Central Bank and international policy makers to lend dollars to banks to tame the credit crisis seems to be doing the trick.

But, as the song goes, who knows what tomorrow brings?

Throughout this painful sharemarket slump – the S&P/ASX 200 is still down 18% from its 2011 highs – we at The Motley Fool have resolutely, stubbornly and forcefully stuck to one over-riding message.

It goes something like this…

Investing should be a lifelong endeavour. Take control of your own money, and therefore your own financial future. You can’t time the market, buying at the lows and selling at the highs. Don’t panic when all around you are doing so. Over the long-term, your discipline will be rewarded.

Tired of your advice

Yet not everyone shares our beliefs…

I get tired of this same old “buy and hold” advice. In every secular bear market, folks who “stayed the course” generally made very little or no money. Instead, if they’d followed trends and got out of the market when it was crashing and bought back in at some point near the bottom, they’d have increased their wealth substantially.

This heavily edited comment is similar to many we receive at the Fool. We see more of these any time the market’s down, as it has been recently.

Let us point out why this type of thinking is not only wrong but dangerous. Plus, we’ll tell you about what is perhaps the most overlooked factor keeping you from achieving great long-term performance.

What is “buy and hold”?

First, let’s define some terms so we’re all talking about the same thing.

Most of us at the Fool advocate buying a share with the intention of holding for the long term. We do not advocate buying, forgetting, and never monitoring your investment. We may decide to sell for any number of reasons, including valuation or a change in the original investing thesis — all of which are different from market timing.

We define market timing the same as my commenter above: The ability to call tops and bottoms and sell and buy all of our shares accordingly.

We do not mean to imply that we can’t reasonably say when the market as a whole seems undervalued or richly valued — but as we know, the market can continue to go down (or up!) a lot longer than common sense would dictate.

With that out of the way, here’s why “buy to hold” investing works, and market timing doesn’t.

Trade more, be poor

Studies have shown a direct correlation between the amount of trading and portfolio performance, and not in a good way. In the U.S., Brad Barber and Terrance Odean have published at least two studies on this subject, concluding that “trading is hazardous to your wealth.”

Studies are one thing, but direct observational experience is another.

Everyone can name several great buy-and-hold investors, such as Warren Buffett, Peter Lynch, Ben Graham, and Philip Fisher. None of these folks made their fortune by predicting market tops and bottoms; rather, they found great companies at fair prices and held most of them for a long time.

Now, let me ask you, who are history’s great market timers?

Coming up with just a few names wouldn’t be enough to stack against the list of buy-and-hold investors, but at least we could consider the possibility that market timing was viable for some people. Problem is, I’ll bet you can’t come up with one. Single. Name.

Sure, there have been people who’ve made great timing calls; with dozens of bull and bear “experts” constantly cacophonying on Sky Business News and the like, there are folks who are bound to get some calls right. But they can’t do it consistently.

One secret ingredient

And now the most important part of this article, that most-overlooked factor in achieving great investing returns. It is this: The simple step of adding new money to the market on a regular basis. If you aren’t doing this, you’re cutting yourself off at the knees.

For example, it took 25 years for U.S. investors to break even during the Great Depression. On Sept. 3, 1929, the Dow Jones Industrial Average hit 381 — and it did not reach that level again until November 1954. But as Jeremy Siegel pointed out in his book The Future for Investors, those who did little more than reinvest their dividends during that period actually showed an annual rate of return of more than 6% during that 25-year stretch!

Start now

If you’re able to add new money to the market regularly, you’ll be buying more shares when prices are low, and fewer shares when prices are high. You can keep a long-term perspective, and not worry about trying to time the market, and more than likely being left behind when major rallies occur.

The evidence shows — history shows — that this is the best (sane) way for us individual investors to generate the kinds of returns we need to achieve financial independence.

What the bloody hell are you waiting for?

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