What is the buy-and-hold strategy?

Definition and Example of Buy and Hold Strategy

How does the buy and hold strategy work?

What does this mean for individual investors?

Advantages and Disadvantages of the Buy and Hold Strategy

Definition and Example of Buy and Hold Strategy

The buy and hold strategy is an investment strategy in which an investor buys stocks and holds them for a long time. In other words, it involves enduring any fluctuations in the stocks you own rather than attempting rapid trading based on price movements.

Key points of the strategy:

• The buy and hold strategy is a type of passive investment where a person buys securities and intends to hold them for years or even decades.
• The central idea of this strategy is that it is better to endure any fluctuations than to try to time the market.
• The buy and hold strategy can be used in conjunction with other strategies like dollar-cost averaging.

How does the buy and hold strategy work?

The buy and hold strategy is very simple. You just need to choose a stock or an exchange-traded fund (ETF), buy it, and hold it for years or even decades.

Note: The buy and hold strategy is often a long-term strategy, but the exact period you hold it depends on your reason for investing. For example, if you are investing for your retirement fund, you may hold stocks for decades until you decide to retire.

Passive investing through buy and hold is consistent with the efficient market hypothesis (EMH). This theory states that all known information about securities (stocks, in this case) is already reflected in the prices.

This theory contrasts with active investing, which requires skill, knowledge, and research in an attempt to outperform the market. According to the efficient market hypothesis, an active investor cannot be more effective than someone who buys and holds.

Not all investors who buy and hold believe in the efficient market hypothesis. The buy and hold strategy is also consistent with value investing. Value investors often use a fundamental analysis approach. They attempt to find stocks in companies that they believe are undervalued compared to the company’s intrinsic value.

When they find one of these stocks, they will buy it and hold it until something changes: either the stock price becomes so high that the stock is worth more than the company, or the company may change its business model in a way that reduces its value.

What does this mean for individual investors?

When deciding on your investment strategy, you will need to determine your goals, your time frame, and how much risk you are willing to take. Some investors are willing to take significant risks in hopes of achieving high returns. Others may have only a short time to invest their money and generate returns.

The buy and hold strategy may be more suitable for investors who have a lower risk appetite and ample time ahead of them. It also doesn’t require much time or skill, unlike other types of investments. You just need to select the right securities, buy them, and not sell them.

Consider whether a long-term passive strategy like buy and hold could be suitable for your goals.

Advantages and Disadvantages of the Buy and Hold Strategy

Advantages:

• Cost-saving: One of the main arguments for the strategy is that holding for longer periods requires less frequent trading than other strategies. This reduces trading costs, which can increase the overall net return of the portfolio. Even if your broker does not charge trading commissions, you can benefit from more favorable capital gains rates.
• Risk reduction: The passive investment approach reduces what is known as “management risk.” This is the risk that an individual incurs by actively managing their portfolio. In other words, by following a more passive strategy, you reduce the risks of human error.
• Simplicity: Buy and hold is simple and blends well with other straightforward strategies like dollar-cost averaging and index fund investing. If you build an investment portfolio based on these strategies, you won’t need to make many decisions or conduct extensive research. This automated approach saves a lot of time and simplifies the investing process.

Disadvantages:

• Risks
  Price: Stock prices rise and fall; there is no guarantee as to when prices will return to a certain level. If you buy and hold, you may not think about the price as much as other types of investments do. This could make you more prone to buying stocks when they are expensive and selling them when they are cheap.
• Capital Risk: Capital risk applies to most types of investments, especially when it comes to stocks. This means there is no guarantee that your money will be available when you need it. A stock’s price could drop after you invest in a company, without ever recovering. If that happens, you lose at least part of your initial investment, also known as “capital.”
• Loss of Flexibility: The ideal buy-and-hold strategy always depends on buying and holding, regardless of market fluctuations. In some cases, this can lead to losses. An example of this was the Great Depression and the accompanying bear market. During that volatile period for stocks, active traders made far greater profits than those who bought and held.

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Source: https://www.thebalancemoney.com/what-is-buy-and-hold-2466543