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 the buy and hold 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.
Does buy and hold really work? ›
A buy and hold strategy is a long-term, passive strategy in which investors keep a relatively stable portfolio over time, regardless of short-term fluctuations. The success of buy and hold has been proven by historical data and is the preferred investing strategy of industry giants such as Warren Buffet.
Is it better to buy and hold or trade? ›
Research shows that long-term buy-and-hold tends to outperform, where market timing remains very difficult. Much of the market's greatest returns or declines are concentrated in a short time frame.
What is the buy and maintain strategy? ›
Buy and maintain credit investing is focused on efficiently capturing the credit risk premium available in fixed income markets whilst preserving portfolio value over time.
What is a top priority for a buy and hold investor? ›
Financial Securities
Buy-and-hold investors prioritize owning shares of companies with strong business fundamentals. They're more concerned with how a company is performing than with short-term changes in the company's stock price.
What stocks to buy and hold for 20 years? ›
7 of the Best Long-Term Stocks to Buy and Hold
| Stock | Sector | Trailing 12-month dividend yield* |
|---|
| International Business Machines Corp. (ticker: IBM) | Technology | 3.6% |
| Abbott Laboratories (ABT) | Health care | 1.9% |
| Stanley Black & Decker Inc. (SWK) | Industrials | 3.5% |
| Atmos Energy Corp. (ATO) | Utilities | 2.7% |
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To benefit from the growth potential in the stock markets, some of the best stocks to buy include Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and NVIDIA Corporation (NASDAQ:NVDA).
How long should I buy and hold stocks? ›
If your stock gains more than 20% from the ideal buy point within three weeks of a proper breakout, hold it for at least eight weeks. (The week of the breakout counts as week 1.) If a stock has the power to jump more than 20% so quickly out of a proper chart pattern, it could have what it takes to become a huge winner.
Is buy and hold investing dead? ›
No, it doesn't mean buy-and-hold is dead. But after 40 years of working in our favor, the most important trend in the global investment markets is no longer our friend, and it suggests a fundamental shift in the nature of the stock market.
With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].
What is the alternative to buy and hold? ›
2. Market Timing. Those who follow the markets or specific investments closely, such as day traders, may be able to beat the buy-and-hold strategy if they can consistently time the markets correctly to buy when prices are low and sell when they are high.
What is the highest returning investment? ›
Key Takeaways
- The U.S. stock market is considered to offer the highest investment returns over time.
- Higher returns, however, come with higher risk.
- Stock prices typically are more volatile than bond prices.
- Stock prices over shorter time periods are more volatile than stock prices over longer time periods.
To help you choose your purchasing strategy you should:
- aim to understand as much of the full cost of building or buying a product as possible.
- decide the upper cost you're willing to spend based on the business outcomes you want to achieve.
- understand what is available in the technology market.
Long-term stock investments tend to outperform shorter-term trades by investors attempting to time the market. Emotional trading tends to hamper investor returns.
What is the general strategy for buying and selling stocks? ›
One of the most basic and widely used strategies for buying and selling stocks is to follow the trends. This means that you buy stocks that are going up and sell stocks that are going down. The idea is that you ride the momentum of the market and avoid holding stocks that are losing value.
What are the best buy and hold stocks? ›
To benefit from the growth potential in the stock markets, some of the best stocks to buy include Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and NVIDIA Corporation (NASDAQ:NVDA).
How do you become a buy and hold investor? ›
Buy-and-hold investing is a passive strategy that first entails purchasing stocks, securities, and other financial assets like real estate. You then hold onto these investments, awaiting medium- or long-term returns while ignoring short-term fluctuations in their market price.
What is the difference between buy and hold and stop loss strategy? ›
The buy-and-hold strategy requires fundamental analysis in long-term periods, while the stop-loss method requires the detection of stock return patterns and is more usable in the short term.
Is buy and hold a passive strategy? ›
A buy and hold strategy is a type of passive investment strategy in which investors buy equities and other securities — such as mutual funds, index funds, and exchange-traded funds (ETFs) — and hold on to them for a long period of time.
