"Buy and hold" is a popular stance amongst many investors who prefer to hold their investments for the long term and not give in to the short term fluctuations in the market. The strategy certainly works as it prioritises long term stability over short term profit. Many well-known investors have proven the strategy's ability to yield consistent returns.
In this article, we look at the "buy and hold" investment strategy and answer the following questions:
Buy and hold is a well-known investment strategy where the investor selects his financial assets (whether stocks, bonds or real estate) and retains them for the long term without reacting to market fluctuations. It is a passive investment strategy where the investor forgoes short term volatility and gains to keep a stable portfolio. This strategy is well-received because it works and has shown to outperform other investment methods on average. Many well-known investors have tried and succeeded through buying and holding.
The logic behind this strategy stems from the fact that investments, no longer how risky it is, is more likely to generate consistently higher returns because of compounding. And markets are known to go up rather than down. Of course, investors must adhere to the buy and hold strategy with a certain kind of mindset. Investors must buy those expected to exceed in value in the long term and not sell when the prices fall. Investors must refrain from market timing because that is not their investment goal.
Buy and hold has a considerable amount of benefits for the investor. Hence, many investors put their faith in it despite recognising that the growth will be slower. Equity holders, mostly, value their investments because they have ownership of the asset of the equity, and ownership is not to be treated as a short term tool. The following are the most common benefits investors get to enjoy through buy and hold:
Despite generating good results on average, buy and hold should not be treated as a superior method to others. Granted, studies have shown consistent, stable returns, but it only supports investors whose goals aligned with the strategy. As such, there are few drawbacks of buy and hold that investors should consider, in the following:
Like any investor or trader, buying and holding require a sound risk management strategy to be implemented. The investor must be willing to put a stop to the investment before the losses compound. Buy and hold remains the preferred strategy and proven in the market since it costs low, it is passive, and it does not require timing the market. However, investors are still missing out on opportunity costs and potentially be inviting losses by betting on their growth expectations.
Last update: 12/08/2021
Disclaimer: Some text on this website is purely for marketing communication. Nothing published by Quanloop constitutes an investment recommendation, nor should any data or content published by Quanloop be relied upon for any investment activities. Quanloop strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decision.