While one could make a case either way, investing in this day and age one can't rely on buying and holding as an effective, sure fire method of creating wealth anymore. There are a couple of major factors that make this the case.
1) CEO's are given more monetary incentive than ever before to take gigantic risks to make money for the company. The problem with this is there is no positive results needed to make the money. Just look at Wamu as one example where the top executives were given great compensation for taking risks that ended up destroying the shareholders value and creating enormous write downs for the company. Even as they announced major problems with the risks they had taken they were paying themselves enormous sums of money as if they had done a great job! This is ridiculous and will only continue as there is no accountability for the end result of their bonus driven risk taking.
2) With the advent of the IRA one can make profitable trades in and out of stocks with tax deferred until you need the money. So you can get the tax advantages of buying and holding with the added bonus of being able to respond to changes in the economy through buying and selling. I personally do most of my "trading" exclusively in my IRA account, if you don't have one yet you are missing out big time.
3) Average annual returns, although advertised at 10% or more by financial advisers is actually closer to 5% if you look at the history of the market during the 20th century*. Guess what the compounded annual return has been so far this 21st century, less than 3%*!! With inflation rising to 5% and beyond many times during the same period you actually are losing purchasing power some years further diminishing the returns of investors who buy and hold. Furthermore our economy has seen it's best days and these returns will only get smaller over time if the first 8 years of this century are any indication.
4) The last reason, that is always overlooked, is how companies still "juice" earnings through pension expenses. I won't overwhelm you with the complexity of this sham, but let me tell you that for the majority of companies in the S&P with pension plans they averaged assuming an 8% gain per year! They have the audacity to assume this return year after year even though over a quarter of their funds are in cash or bonds that yield less than 5% per year. Once this is put to rest like the options accounting mess that has taken place in recent years we will see massive restatements of earnings that will only hurt shareholders.
The only reason to buy and hold in this day and age is due to investment competency. If you have done great research and have good competency that there is a long term cycle you can take advantage of then you would buy to take advantage of that cycle and hold for the duration of the cycle. If you don't have the discipline to constantly do research on stocks, bonds, commodities, etc. (bad competency) than you shouldn't be investing in them by yourself. The best thing would be to either invest in an index fund if you are happy with average market returns, a mutual fund with a great fund manager if you like a little more risk, or buy shares of Berkshire Hathaway (brk) which is basically a no fee fund run by the greatest buy and hold investor of all time. For the record, over the last 40 years Berkshire's compounded annual gain has been 21% while the S&P, even with dividends included, has only done 10%!
In the end it is best to be diversified. I have Berkshire Hathaway shares that satisfy my buy and hold area, Asian market driven stocks to take advantage of a long term cycle of growth, and a list of stocks I am currently researching or buying/selling that takes advantage of current conditions in the economy. Also I always remember the old adage of "buy low, sell high" if you only buy and never sell you are not following the most important way to profitably invest. Why not do as I have done with Google over the years, buy it on weakness $350-$450 and sell into strength $550-$650, although I never fully liquidate my position I do reduce it when up and increase it when down.
*All compounded annual gains are calculated from the S&P 500 with dividends included.
