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.
