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"We try to take all of the emotion out of investing," he said. "Investors need to have a disciplined strategy since buying and holding has left investment gains hard to come by since 2000."
In this current market environment, investors have the potential of "sitting in a stock and bond bubble because of where interest rates are," Shealer said.
Preserving your capital can be more vital than growing your investments, he said. Investors who bought equities in 2007 are just now getting back to even in 2013 from the losses they sustained. Investors who sold their equity holdings at the bottom of 2009 lost 55% of their money if they held it from the top in October 2007 and needed to make a gain of 122% in order to reach their original value, Shealer said.
The average investor needs to focus on it preserving capital.
"If you lose 40%, then you need to make 60% to make it back to even," Shealer said. "Keep a higher capital base and grow from that and make sure you are not losing money."
To avoid bear markets, which the industry generally accepts as a 20% drawdown, investors must view pullbacks and corrections as if they are the next bear, said Will McGough, a portfolio manager for Stadion Money Management, an ETF manager with $6 billion in assets under management who uses a technical approach to investing and allocates their portfolios based on market signals.
"Protecting against losses should be paramount to investors," he said. "This is easier said than done. To help Stadion manage the emotion of actively managing portfolios to avoid loss, we rely on strict discipline in following our investment process. We won't always be right in moving to cash, but we won't stay wrong as we have the flexibility to tactically move between cash and equity positions."
The market can sometimes dictate that cash is the most suitable place to invest your money and is a legitimate asset class, not a defensive place to park money, McGough said. The firm has 20% to 33% of its holdings in cash on average and will move to 100% occasionally.
"It is the only true safe-haven during volatile environments of unknowns," he said. "At some point during every year of our live track-record, we have been fully invested in cash."
The buy and hold strategy of investing can still be a very practical investment approach for some people, especially risk adverse investors.
"Recovering from a 5% loss is much easier than recovering from a 20% one," McGough said. "Some argue 'buy and hold' died after the 2008 bear market."
Cash is a better asset class than equities or other assets when the market appears volatile, he said.
"Stadion employs cash to reduce the volatility of our portfolios when our models signal for probabilistic expected market decline," McGough said. "At that juncture we expect cash to be a top performing asset class, which is usually when we expect equities and other assets to depreciate in value."
Investors are often concerned with how positions in cash will affect their buying power because of inflation, he said.
"What investors must understand is our use of cash is not a strategic one," McGough said. "Managers with strategic use of cash must be concerned about the purchasing power of said cash. We generally employ cash positions at times when we are concerned about equity volatility, not inflation."
Investing in cash can be the best defensive position for an investor to take, said Dave Levine, a portfolio manager on Covestor, a registered investment adviser with offices in Boston and London.
Levine runs the Aspect Large Cap Value Portfolio on Covestor and as of March 26 had 28.3% of that portfolio in cash, down from 35% in February.
"Rather than speculate, my goal is to add cash to the portfolio as a defensive maneuver," he said. "While it does not make money, it does not really lose money either. I believe that in this current environment, where it can be argued that bonds are being artificially inflated by Fed policy, shifting from stocks to bonds is not a viable option."
Investors should avoid buying a stock and holding onto it in the hopes that its value will increase again, Levine said.
"In this current market, buying and holding is a way to shift blame from yourself to the market for work that really needs to be done," he said. "Holding a stock for ten years is like owning a business for ten years. It needs to be looked after, cared for and understood."
Investors should "stay in harmony with market trends and that means being in stocks when the trend is up and getting out once the trend turns down," said Matthew Tuttle, CEO of Tactical Management in Stamford, Conn.
"'Buy and hold' is not only dead, it was never really alive," he said. "It appears to work because the market is up most of the time, but we will always have bear markets and buy and hold will never protect against them. People might argue that your money will always eventually come back. What never comes back though is the opportunity cost of what you could have had if you had avoided the loss in the first place."
--Written by Ellen Chang for MainStreet