There are many different strategies to sound investing, and the strategies that work well are those that are best suited to a particular investor’s style. Buy and hold investing works well for many investors and is a fairly commonplace investing method.
Buy and hold investing provides advantages in many areas and is a successful strategy for many investors. The reasons why buy and hold works well range from lower taxes to greater peace of mind, but buy and hold also has a few drawbacks.
So what is buy and hold? And how does it work? According to My SMP, “Buy and Hold is a basic investing strategy where investors buy and hold a security for an extended period of time. The belief is that it is better to allow a security the opportunity to grow over time, versus attempting to trade in and out of a stock for quick gains.”
One of the best know and most successful investors of our time, Warren Buffet, is known for his buy and hold strategy.
The benefits:
Allows an investor to remain passive
Buy and hold investing is considered a passive investing strategy. The securities are held for a long term and the investor therefore does not have to worry about timing the market and trying to predict the endless ups and downs of the markets daily.
For an investor that doesn’t have the time or means to track the daily cycle of the stock market buy and hold is a low stress option.
Historically solid earnings
A buy and hold strategy has historically produced a solid record of consistent earnings. Investopedia reports that”According to research conducted by Charles Schwab Company in 2006, between 1926 and 2005, a 20-year holding period never produced a negative result.”
Taxes and fees
Typically, investments held for over a year are taxed at a lower rate. So buy and hold investing means that income from these investments won’t cost as much as if the securities were actively traded. Also, because there isn’t a lot of activity within the portfolio investment fees are kept to a minimum.
The negatives:
Emotions
A large part of investing involves people’s emotions. Investors panic and sell, or they grow attached to a stock and hold it too long. Buy and hold investing isn’t going to work if the investor panics easily and abandons the position. Emotions can cause inopportune investment decisions that will make buy and hold fail.
The bears and bulls
There are periods of strong gains and heavy losses in the stock market. Investing in the midst of a bull market, when stocks are trading high could mean that the investment later drops and barely, if ever, recovers. Selling during a bear market means that an investor could take large losses just for abandoning the position at the wrong time. Buy and sell investing doesn’t take bear and bull swings into account, but as a buy and hold investor you should be careful about when you enter or exit the market.
While there are some drawbacks to buy and hold investing, buy and hold remains a solid investment strategy that does work well for many investors. It is really up to individual investors to determine if it is a strategy they are comfortable with and can navigate effectively.