Buy and hold is a passive investment strategy where investors purchase stocks—or other securities like ETFs—and retain them for a lengthy period irrespective of market fluctuations. This approach involves actively selecting investments while disregarding short-term price movements and technical indicators. Legendary investors such as Warren Buffett and Jack Bogle advocate for the buy-and-hold strategy, deeming it ideal for those seeking healthy long-term returns.
Key Takeaways
- Buy and hold is a long-term passive strategy, maintaining a stable portfolio despite short-term market shifts.
- Investors adopting this strategy often outperform active managers over extended periods and can defer capital gains taxes.
- Critics argue that buy-and-hold investors might miss optimal selling opportunities.
How Buy and Hold Works
Conventional investing wisdom suggests that over a long-term horizon, equities yield higher returns compared to other asset classes like bonds. There is ongoing debate over the superiority of a buy-and-hold strategy versus active investing. Though both strategies have their merits, buy and hold offers tax benefits by allowing deferral of capital gains taxes on long-term investments.
Purchasing common stock shares means taking ownership of a company, offering privileges such as voting rights and a stake in corporate profits. Shareholders influence crucial decisions, including mergers and acquisitions, and elect directors to the board. Activist investors with substantial holdings may even secure board representation.
Committed shareholders who recognize that change takes time often adopt buy-and-hold strategies. Unlike day traders, these investors retain shares through varied market conditions—both bull and bear—and hence accept the risk of potential failure alongside the possibility of significant appreciation. Buy-and-hold is also known as position trading.
Active Versus Passive Management
The debate continues between passive and active management styles. A buy-and-hold investor exemplifies passive management. In mutual funds or exchange-traded funds (ETFs), indexed portfolios mirror common benchmarks. As indices rebalance based on market capitalization, passive funds usually maintain low turnover rates, reflecting widespread market issues while holding stocks as long as they remain index components.
While long-term holding is key in a buy-and-hold strategy, recognizing price fluctuations and monitoring investment performance remains essential.
Real-World Example of Buy and Hold
Consider an investor who purchased 100 shares of Apple (AAPL) at $18 per share in January 2008 and held onto the stock until January 2019, watching it rise to $157 per share. This resulted in a remarkable return of nearly 900% in just over a decade.
Detractors of long-term strategies argue that investors miss out on gains by riding through volatility, rather than locking in profits, and fail to time the market for optimal gains. While some professionals succeed with short-term trading, the stakes are often higher. Ultimately, investment success also hinges on loyalty and a steadfast commitment to maintaining chosen positions without frequent movement.
Related Terms: passive investing, active investing, equities, asset classes, capital gains tax.
