"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 popular investing strategy in which an investor chooses his financial assets (stocks, bonds, or real estate) and holds them for the long term without reacting to market swings. 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.
Buy and hold involves an investor buying financial or non-financial assets with the intention of reaping a price increase despite market instability. The basic principle behind buy and hold investing is to stay involved throughout market cycles, as missing a few of the finest days can have a significant influence on your long-term profits.
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.
The buy and hold strategy is straightforward. You simply need to choose the assets you want to invest in and after purchasing it, you hold it for years. Buying and holding is typically a long term strategy. However, the amount of time you keep, depends on your financial goals. If you buy and hold stock for your retirement fund, for example, you could keep them for decades until you decide to retire. If you buy and hold real estate, you may decide to sell it after the market price rises or you can keep it to pass it over to your children.
The Efficient Market Hypothesis supports passive investment through buying and holding. According to this hypothesis, all known information regarding investment securities has already been included into the price. This theory also states that an investor who is trying to beat the market through research and knowledge will not be more effective than an investor who is simply utilising buy and hold strategy.
However, not all buy and hold investors agree with this theory. Value investing is also aligned with buy and hold. Fundamental analysis is frequently used by value investors. They will look for stocks in companies where the price is lower than the actual value of the company. Investors will buy it and keep it until either the stock's price rises to the point where it is worth more than the company, or the company's business model changes, lowering its value. Based on the outcome, the investor may keep it or sell it.
So how to calculate buy and hold return? You can only calculate your returns after you have sold the investment. You will be able to evaluate how much you paid for it to how much you sold it for.
There are no examples of ultimate buy and hold portfolio strategy. Your buy and hold strategy would depend on what kind of asset class you are investing in. If you invest in equities, then your buy and hold strategy would be to buy low and sell high. If you choose bonds, your buy and hold bond strategy would be based on the belief that bonds are a dependable source of income. The bonds' cash flow can be used to cover external income needs or reinvested in the portfolio to buy more bonds or diversify into other asset classes. If you choose to buy properties, your buy and hold real estate strategy would be to produce rental income and grow wealth over time, refinance, or sell when the time is appropriate. Another buy and hold strategy real estate investing would be to use a cash-out refinance to take equity out of one home and use it to purchase another instead of selling it.
The theory behind buy-and-hold investing is that you will eventually be rewarded for taking on additional risk, but only if you stick to your guns and stay the course. Despite the evidence in favour of buy-and-hold investing, many investors find it difficult to sit back and wait for their investments to grow. This is due to the anxiety and pain that come with a higher level of investing risk, which many investors fear. During times of market volatility, a prudent buy and hold strategy can suddenly morph into an active trading approach. This can result in you not only buying and selling at inopportune times, but also increasing your investment costs due to trading commissions. Also, there are no assurances that the buy and hold strategy will not lose you any money at all. Yet, there are good reasons why buy and hold can be beneficial.
Buy and hold investment strategy has a considerable number 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 buy and hold strategy advantages:
Buy and hold risks are not talked about enough. 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 buy and hold returns, but it only supports investors whose goals are aligned with the strategy. As such, there are a few disadvantages of buy and hold strategy that investors should consider:
"Buy and hold" is a common approach in which you invest for the long term rather than reacting to short-term market changes. Long-term stability is prioritised over short-term profit in this strategy. Buy and hold techniques can be used in shares, bonds, real estate, and a variety of other asset classes. While it has advantages, it also has disadvantages. Higher returns, tax savings, and lower costs are some of the perks. The disadvantages of buy and hold strategies are that they are time-consuming, that you may lack the discipline to not succumb to fear and sell your assets when they are not performing well, and that they are not immune to losses or swings.
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 is proven in the market since it costs little, it is passive, and it does not require timing the market. However, investors are still missing out on opportunity costs and could potentially be inviting losses by betting on their growth expectations.
Last update: 12/08/2021
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