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 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.
What is a buy and hold investment strategy? ›
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 investing strategy known as buy and hold? ›
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 the buy and hold strategy investopedia? ›
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.
What is buy and hold strategy in real estate? ›
Buy and hold real estate is a long-term investment strategy where an investor purchases a property and holds on to it for an extended period. The owner typically intends to sell it down the line but will rent out the property until then to help with buy and hold real estate financing.
What does "hold" mean in investing? ›
A 'hold' is generally an experts suggestion or recommendation to not either sell or purchase securities. A firm making a recommendation to hold is usually anticipated to perform with the market or at a similar pace of peer companies. This rating is considered to be better than sell and not better than purchase.
What is the hold strategy? ›
a course of action appropriate for a product (usually in the decline stage of its life cycle) in which a company decides to hold by keeping expenditure on it to a minimum to maximise the return before having to delete it from the line.
Is buying hold a good investment? ›
Throughout history, gold has been seen as a special and valuable commodity. Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier. As a global store of value, gold can also provide financial cover during geopolitical and macroeconomic uncertainty.
How do I buy hold? ›
While you can buy gold bars from certain banks, it's much more common to use online dealers. You may also be able to buy gold bars from a pawn shop or individuals, and these sources may also offer gold coins. Even big-box retailer Costco is getting in on the action, offering one-ounce gold bars to its members.
What is your investment strategy? ›
Key Takeaways. An investment strategy is a plan designed to help individual investors achieve their financial and investment goals. Your investment strategy depends on your personal circ*mstances, including your age, capital, risk tolerance, and goals.
With buy and hold, you buy a stock or other equity and hold onto it. In other words, you don't sell it. The strategy behind buy and sell investing is that if you hold onto an asset long enough, even if there is volatility in the market, the asset may gain value.
Why doesn't buy-and-hold work? ›
A Market Selloff
As a result, buy and hold portfolios can lose some or all of their gains. A few bad stocks might be enough to drag the portfolio into a negative return. Merely holding a well-run company doesn't guarantee the stock price will rise indefinitely.
Why doesn't buy-and-hold work anymore? ›
Buy and hold makes no sense because it implies the risk of assets is always justified by the reward. The idea that every year is a good year to own stock is patently false.
How to analyze a buy-and-hold property? ›
Here, we go over eight critical metrics that every real estate investor should be able to use to evaluate a property.
- Your Mortgage Payment. ...
- Down Payment Requirements. ...
- Rental Income to Qualify. ...
- Price to Income Ratio. ...
- Price to Rent Ratio. ...
- Gross Rental Yield. ...
- Capitalization Rate. ...
- Cash Flow.
Which of the following are advantages of the buy and hold strategy? Low transaction costs, capital gains taxed at the long- term rate, portfolio requires less time and energy to manage than for most other strategies.
What does buy hold and sell mean in stocks? ›
A “buy” rating means analysts like the stock and think it's worth purchasing because its value is likely to increase. A “hold” rating is neutral. It means analysts are unsure which way share prices will move, so they recommend that you neither buy nor sell. A “sell” rating means analysts expect share prices to fall.
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 a buy-and-hold strategy an example of strategic asset allocation? ›
An SAA strategy is used to diversify a portfolio and generate the highest rate of return at a given level of risk. It is similar to a buy-and-hold strategy in that target asset weights are chosen and maintained over a long period of time.
Is it better to hold or buy and sell? ›
In most cases (the 8-week hold-rule being an exception), you're better off locking in at least some of your gains to avoid watching your profits disappear as the stock corrects. And you can potentially compound those gains by shifting that money into other stocks just starting a new price run.
