Understanding Buy and Hold Investment Strategy
The “buy and hold” investment strategy is when an investor purchases stocks and holds on to them for many years -- decades or until the investor reaches retirement, or even later. When you buy stocks with the intention of holding them for decades, you are more likely to steer clear of trendy companies or up and coming, high risk businesses.
Choosing good companies to begin with, makes a difference to your profits, but holding stock for decades will offer better results for the average investor than attempting day-to-day trade without intense knowledge and analysis of the market.
Warren Buffett is listed on the Forbes 2020 World’s Billionaire list as the sixth-richest man in the entire world. He relies on a buy and hold strategy for investments, and it can be argued that as an investment strategy, it’s one of the best options you have for increasing your wealth over the long term, in most every situation.
Tax Benefits of the Buy and Hold Strategy
One reason many investors prefer to buy and hold investments is that you defer capital gains taxes, money you would have otherwise paid tax on, while it continues to earn additional money. It is actually enabling you to make money from the money you would have owed in taxes, which further increases your earnings over time.
When You Should Sell Your Stocks
If you decide to buy and hold stocks under this investment strategy, you should know when the strategy isn’t going to work or when it makes more sense to sell the stock you purchased with the initial intent to hold until retirement or later. There are exceptions to every rule, including the buy and hold strategy. Here are a few situations when you may decide to abandon ship and sell your stocks rather than hold them:
- Company files bankruptcy
- CFO indicted for accounting problems or theft
- Company does something that goes against your personal values or beliefs
Read: What Are Commodities?
When You Should NOT Buy and Hold
Most everyone will benefit from using the buy and hold strategy for investing, but there are certain situations when it may not be your best option:
- High Risk Tolerance -- there is some investors who are simply born to be a day trader. They have a high tolerance for risk and are often the same people who can be found “letting it ride” at the casino! Day traders need to spend a lot of time analyzing and researching the market so they can make their trades in real-time and at the exact right moment. If this describes you, then the buy and hold strategy is probably not going to satisfy your investment needs.
- Professional Investor -- if you are a professional investor and spend hours analyzing stocks and the market, and have access to the technical information and company data needed to make trading decisions, the buy and hold strategy may not be your go-to investment strategy. It has been found that even professional money managers are unable to beat stock market index funds over long periods of time, however, so even if you decide to try other investment strategies, it may pay to have at least a percentage of your money invested in a buy and hold strategy.
The Bottom Line
Buy and hold investing is a long-term strategy. Warren Buffett, for example, buys stocks with the intention of holding them almost indefinitely. He once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” By holding a variety of stocks and maintaining a long-term outlook, you can sell your stocks only when their price exceeds their fair market value (thus earning a profit).