The strategy of buy-and-hold investments is an investment strategy where the investors buy or invest in securities or assets over a long period of time without any intention of selling in the short term. The investors retain the investment, ignoring all the price movements, ups or downs, in the short term.
This buy-and-hold form of investment is quite passive. In simple words, traders who prefer this strategy feel that the time in the trading market is more critical than timing it. However, it is not so simple to time the market perfectly, but it is definitely easy to hold a stock for long.
How Buy-and-Hold Works?
The Buy-and-Hold strategy is straightforward. A trader just needs to pick an ETF or stock, buy and hold on to it for as long as needed. This is a passive form of investing which aligns with the EMH or Efficient Market Hypothesis.
Active Versus Passive Management
According to the Efficient Market Hypothesis, all known data or information relating to investment securities, in this case, stocks, is factored in the price. The theory functions in contradiction to active trading that needs research, knowledge, and skill to beat the market. Under the EMH theory, a passive investor who buys and holds stocks can effectively be more efficient than an active investor.
However, not many buy-and-hold investors follow the EMH theory. The strategy also follows the value investing strategy. Value investors often use a fundamental analysis approach and attempt to invest in those stocks in which the price, in their opinion, is low in comparison to the company’s fundamental value. Once they find such stocks, they buy and hold them till something changes – either the company modifies the business model that lowers the stock’s value or the stock’s price increases—making it more valuable than the firm.
Pros and Cons of the Buy and Hold Strategy
Pros of Buy and Hold Strategy:
Cost-saving – One vital aspect of this buy-and-hold strategy is that if a trader holds a stock for too long, it requires less frequent trades compared to other trading strategies. This means the trading costs are also minimized, which can raise the overall return of the portfolio. Even if the brokerage charges trade commissions, traders can still gain from favorable capital gains tax rates.
Reduced risk – Being a passive investing method, it reduces manager risks. Manager risk is when someone takes risks for actively managing traders’ portfolios. So, for a more passive investing strategy, one can reduce the inevitable risk of human error.
Simplicity – Buying and holding stocks is quite simple and blends with other straightforward strategies like an index fund and dollar-cost averaging investing.
Cons of Buy and Hold Strategy:
Price risk – Prices of stocks rise and fall frequently, and there is no guarantee that the price will become stable. If a trader buys and holds, he may not spend much time assessing the stock’s price compared to other investors. This may make the traders more vulnerable to buying stocks when they are expensive and selling them when they are cheap.
Lacks flexibility – An ideal buy and hold strategy involves buying and holding, irrespective of market fluctuations. In many cases, this leads to losses. For instance, during the Great Recession with the bear market, active traders made more money than buy-and-hold traders.
Instruments that could be used with a buy and hold strategy
The buy and hold strategy is adopted by choosing the following instruments – Exchange Traded Funds (ETFs) or Index Funds. Both instruments imitate the same composition of the index that they follow.
ETF – An ETF, on the other hand, is a bulk of stocks listed and traded on any stock exchange. Here, traders can buy or sell any unit of ETFs during market hours.
Index Fund – Trader and buy and sell index fund from an Asset Management Company or a fund house. Index fund’s expense ratio is lower than an actively managed fund.
Banxso’s Guide for ‘Buy-and-Hold Strategy’
Banxso is a popular commission-free trading and investment platform that offers various trading instruments and safety features which is why more and more traders are choosing Banxso over other trading platforms. The Learn section teaches new traders about the different forms of trading, including the Buy and Hold strategy. According to Banxso, the goal of traders who follow the buy and hold strategy must be to buy at a low price, keep for the long term and sell when the price is high. Banxso has developed trading tools, resources, and strategies to support all kinds of traders. Also, the commissions are low.
The buy and hold strategy is also known as position trading, and the reason why this form of investment is popular among passive investors is that long-term investments usually perform better when investors time their investments and not the market. Banxso offers resources to traders to learn the specifics of this strategy in depth.