What Is Buy and Hold?
Buy and hold is a passive investment strategy inwhich an investor buys stocks (or other types of securities such as ETFs) and holds them for a long periodregardless of fluctuations in the market. An investor who uses a buy-and-hold strategy actively selects investmentsbut has no concern forshort-term price movements and technical indicators. Many legendary investors such as Warren Buffett and Jack Bogle praise the buy-and-hold approach as ideal for individuals seeking healthy long-term returns.
Key Takeaways
- Buy and hold is a long-term passive strategy where investors keep a relatively stable portfolio over time, regardless of short-term fluctuations.
- Buy and hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes.
- Critics, however, argue that buy-and-hold investors may not sell at optimal times.
How Buy and Hold Works
Conventional investing wisdom shows that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, some debate over whether a buy-and-hold strategy is superior to an active investing strategy. Both sides have valid arguments, but a buy-and-hold strategy has tax benefits because the investor can defer capital gains taxes on long-term investments.
To purchase shares of common stock is to take ownership of a company. Ownership has its privileges, which include voting rights and a stake in corporate profits as thecompany grows. Shareholders function as direct decision makers with theirnumber of votes being equal to the number of shares they hold. Shareholders vote on critical issues, such as mergers and acquisitions, and elect directors to the board. Activist investors with substantial holdings wield considerable influence over managementoften seeking to gain representation on the board of directors.
Recognizing that change takes time, committed shareholders adopt buy and hold strategies. Rather than treating ownership as a short-term vehicle for profit in the mode of a day trader, buy-and-hold investors keep shares through the bull and bear markets. Equity owners thus bear the ultimate risk of failure or the supreme reward of substantial appreciation.
Buy and hold is often also called position trading.
Active Versus Passive Management
The debate over passiveversus active management styles persists. A buy-and-hold investor reflects a passive management style. In the case of a mutual fund or exchange-traded fund, indexed portfolios mirror that of a common benchmark.
As indices rebalance and weightings increase relative to market capitalization, turnover rates, which are often under 5% among passive funds (such as an S&P 500 Index portfolio), remain ultra-low as managers focus on issues across the broad market. Stocks are held for as long as they remain components of the indices.
Even though you hold the securities you buy for the long-term, you still need to consider price fluctuations and pay attention to their performance.
Real World Example of Buy and Hold
An example of a buy-and-hold strategy that would have worked quite well is the purchase of Apple (AAPL) stock. If an investor had bought 100 sharesat its closing price of $18per share in January 2008and held onto the stock until January 2019, the stock climbed to$157per share. That’s a return of nearly 900%in just over 10 years.
Those arguing against using a long-term strategy claim that investors forsake gains by riding out volatility rather than locking in gains and miss out on timing the market. There are some professionals who regularly succeed with short-term trading strategies, but the risks can be higher. Investment success isalso realized by loyalty, commitment to ownership and the simple pursuit of standing pat or not moving from a chosen position.
FAQs
Buy-and-hold is a passive, long-term investment strategy that creates a stable portfolio over a long period of time to generate higher returns. Instead of trading shares based on stock market timing, investors buy stocks and hold onto them despite any market fluctuation.
What is a Buyandhold investment strategy? ›
The Buy and Hold strategy is an investment approach where individuals purchase securities, like stocks or bonds, with the intention of holding them for a long period, typically years or decades. This strategy focuses on long-term potential rather than short-term market fluctuations.
What is an example of buy-and-hold investing? ›
Real World Example of Buy and Hold
If an investor had bought 100 shares at its closing price of $18 per share in January 2008 and held onto the stock until January 2019, the stock climbed to $157 per share. That's a return of nearly 900% in just over 10 years.
Is buying hold a good investment? ›
RITA: Right, people invest in gold because gold is a valuable commodity. Gold can serve as a hedge against inflation and is considered an alternative asset, other than cash, stocks or bonds, and often retains its value during times of political and economic uncertainty.
Is it better to buy-and-hold or trade? ›
But for most people it's better to be an investor than a trader – and it can take less time and effort, too. Legendary investor Warren Buffett recommends that investors regularly buy into an index fund such as an S&P 500 fund and then hold for decades.
Does buy and hold strategy work? ›
"Buy and hold can result in significant long-term capital gains, which are often taxed at a lower rate than short-term gains," says Collins. On the other hand, he adds, it may take longer for buy-and-hold investors to see returns, compared with using a more active trading strategy.
How do you make money buying and holding stocks? ›
Investors, meanwhile, can make money from stocks in 2 ways:
- Share appreciation. When a company does well financially or becomes more desirable, the value of its stock can increase. ...
- Dividends. Certain companies may decide to share a portion of their financial success with investors through cash payments called dividends.
The biggest drawback of this strategy is the large opportunity cost attached to it. To buy and hold something means you are tied up in that asset for the long haul. Thus, a buy and holder must have the self-discipline to not chase after other investment opportunities during this holding period.
What is a major advantage of a buy and hold strategy? ›
Potential to recoup losses faster
For most investors, a buy-and-hold strategy can result in quicker loss recovery, even after a bear market, when a major index like the S&P 500 falls by more than 20% from its recent high.
How do I buy and hold? ›
Buy and hold refers to an investing strategy practiced favorably by passive investors. An investor using a buy-and-hold strategy actively selects stocks, but once they hold a position, they usually ignore the day-to-day and potentially even month-to-month fluctuations in the stock's price and technical indicators.
The bottom line
Investing in 1-ounce gold bars can be a prudent move for those who are looking to diversify their portfolios and safeguard against economic uncertainties. However, it's crucial to approach this investment with a clear understanding of the market, associated costs and the long-term commitment required.
What is the safest investment? ›
Safe assets such as U.S. Treasury securities, high-yield savings accounts, money market funds, and certain types of bonds and annuities offer a lower risk investment option for those prioritizing capital preservation and steady, albeit generally lower, returns.
What's the best thing to invest in right now? ›
The 10 best long-term investments
- Bond funds.
- Dividend stocks.
- Value stocks.
- Target-date funds.
- Real estate.
- Small-cap stocks.
- Robo-advisor portfolio.
- Roth IRA.
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the alternative to buy and hold? ›
A better alternative to Buy and Hold is the rules-based, unemotional process of trend following. Trend following takes the approach of staying invested in uptrends when there is less risk present, and getting out of the market in a downtrend when there is more risk.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What are the disadvantages of buy and hold strategy? ›
The biggest drawback of this strategy is the large opportunity cost attached to it. To buy and hold something means you are tied up in that asset for the long haul. Thus, a buy and holder must have the self-discipline to not chase after other investment opportunities during this holding period.
What is the investing strategy known as buy and hold? ›
Passive investing, sometimes called buy-and-hold, is a popular investment approach where you invest in stocks and other securities with the intention of holding onto them for an extended period regardless of changes in the stock market.
What is a diversified investment strategy? ›
Diversifying your portfolio is a financial strategy that aims to reduce your portfolio risk by varying the type of assets you invest in, knowing they will perform differently over time. Ensuring you have a diversified portfolio can help reduce your risk exposure and help you feel better prepared for the future.
What is the buy and hold ETF strategy? ›
The basic idea is to buy a security or fund at a certain point in time and then hold it for the entire planned investment period. It is assumed that the investment will increase in value over time due to the growth potential of the underlying market.
