Buy and Hold Strategy

KEY TAKEAWAYS

• Buying and holding strategy is one of the most popular and proven ways to invest in the stock market.
• Like any trading strategy, Buy and Hold has its pros and cons.
• Any investment that is held and sold for a period greater than a year is eligible to be taxed at a more favorable long-term rate.

What is Buy and Hold Strategy

Buy and hold is a passive investment strategy where a trader buys stocks, currency pairs or other types of securities such as ETFs and holds them for a long period regardless of short term fluctuations in the market. The idea behind buy and hold strategy centered on long term tendencies. If you are new to Forex trading, it is best to start with the basics, “What is Forex”.

Buying and holding strategy is one of the most popular and proven ways to invest in the stock market. Investors often do not need to worry about timing the market or making decisions based on subjective models and analysis. Though strategy comes with a large opportunity cost of time and money, investors must be cautious to protect themselves from market failures and know how to cut their losses and take profits, before it's too late.

How Does the Buy and Hold Strategy Work

When investor buy stocks, a priori becomes the partial owner of the company with its privileges that include voting rights and a stake in corporate profits as the company grows. If the amount of shares bought is substantial, investor can influence and ensure his/her future profit. Shareholders vote on critical issues, such as mergers and acquisitions, and elect directors to the board.

Investors have to understand and accept that change takes time. Instead of treating stocks only as a short-term profit, like day traders, traders should invest long term through ups and downs.

Equity owners bear both the ultimate failure risk or the high reward of substantial appreciation

Pros and Cons of Buy and Hold Strategy

• Pros - Buy and hold strategy has proven time and time again to generate high returns on investment. Benjamin Graham, Warren Buffett, Jack Bogle, John Templeton, Peter Lynch are titans of buy and hold strategy, their experience proved us how well this strategy can work. Of course, skill of stock-picking is the main reason for success.

  It is less time and nerve consuming - Investors can sit back and look at the general characteristics of the market, the asset and the opportunities for future growth, and simply let the investment do its thing without worrying about trying to find the “perfect” entries and exits or constantly checking prices.

  Friendly taxes - any investment that is held and sold for a period greater than a year is eligible to be taxed at a more favorable long-term rate, as opposed to a higher short-term rate.

• Cons - When trader buy and hold stock means he/she is tied up in that asset for the long time. Hence investor has to have the self-discipline to not run after other investment opportunities during this holding period. This is difficult to practice, when bought stock is lagging.

  Takes time to see positive movement - there is no specific time interval after which stock will start growing, investors have to arm themselves with patience.

  Crisis - just because a stock has been held for many years, does not mean that it is infallible. If or when a crisis happens, everything might turn backwards.

Bottom Line on Buy and Hold Strategy

The buy and hold strategy is the long term investment strategy, which is perfect for investors who do not have time to keep following up their investment portfolio, on a day in day out basis. Execution of the strategy on its own is not hard, but investor has to be able to find a growing or undervalued stock. To be able realize this kind of investment strategy, investors have to be savvy in long term fundamental analysis, on micro and macro levels.