What Is The Buy And Hold Strategy When Investing: Explained

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Students want to know about the buy-and-hold strategy for investing, including its use for stocks, crypto and real estate.

 

Getting the timing right is often difficult in the stock market. Instead of trying to time the market, passive investment strategies like "buy-and-hold" focus on spending time in the market to achieve long-term returns.

 

The strategy involves buying stocks or other securities and staying invested for long periods, even in uncertain markets. It ignores the short-term highs and lows and makes the most of the long-term potential of stock investing.

 

Are you an investor who prefers a slow but steady wealth-building route? This blog could be for you. Read on to explore the buy-and-hold investment strategy, what it is, how it works, its pros and cons, whether it is a good investment and much more.

 

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eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

 

 

 

1. What Is Buy And Hold Strategy Investing Strategy?

 

Given the difficulty in accurately predicting market ups and downs, successful long-term investors focus on 'time spent in the market' and not 'timing the market.'

 

The buy-and-hold strategy is a long-term passive investment strategy where investors buy securities for a long term, sometimes decades, without intending to sell them soon.

 

Instead, they focus on retaining their investment portfolio over time, regardless of the short-term fluctuations in the market price.

 

The buy-and-hold strategy is the opposite of active investing, wherein investors frequently try to time the market and buy and sell stocks or funds to realise short-term gains, beat the market, and stay ahead of the crowd. 

 

When looking at the average past performance, the strategy tends to outperform active management over longer timeframes and can usually defer capital gains taxes.

 

Buy and hold strategy investors analyse the company's fundaments to decide whether or not it is worth investment. The analysis involves assessing a company on the following factors.

 

  • Past performance

  • Long-term growth strategy

  • Types of products it offers

  • Company's management

 

Let us understand buy and buy-and-hold strategy for investing by an example:

 

Consider this real-life example to see how a buy-and-hold strategy can be a smart choice for investors.

 

Imagine someone bought 100 shares of Apple (AAPL) in 2008 for $18 per share and kept them until 2019.

 

After a decade, the stock's price had surged to $157 per share, resulting in the investor reaping an impressive return of nearly 900% by sticking with the buy-and-hold approach.

 

 

2. How Buy and Hold Investment Strategy Works?

 

Some buy-and-hold investors focus on owning "value stocks" and shares of companies with robust business fundamentals.

 

At the same time, others aim to invest in growth stocks that pursue lucrative business opportunities to enhance their profits and revenues.

 

Regardless of the type of stock, buy-and-hold investors are more concerned with the company's performance than short-term changes in its stock price. As long as the company's business performs well, buy-and-hold investors are happy to continue to hold their investments.

 

Buying such stocks at a price lower than their actual worth (per their business fundamentals) increases the chances of gaining enough value for the price paid.

 

 

 

3. Is Buying And Holding A Good Strategy?

 

The buy-and-hold strategy is a long-term investment strategy that suits investors who need more time to follow up on their investment portfolio.

 

It is an easy-to-implement strategy that involves a one-time stock selection and no need to constantly monitor the stock prices and the short-term market fluctuations due to inflation, business cycles, etc.

 

Unlike active investing, where investors consider assets as a short-term vehicle to earn profits, investors retain the stocks through the bull and bear markets in a buy-and-hold strategy.

 

A buy and hold strategy is more profitable to active investing in various ways such as:

 

  • You may end up buying and selling at the wrong time 

  • Frequent trading may result in higher investment costs in the form of trading commissions.

  • You gain tax benefits by deferring capital gains taxes on long-term investments.

 

 

4. What Are The Buy And Hold Strategy Pros And Cons?

 

Like any investment strategy, a buy-and-hold approach has advantages and drawbacks. Knowing about them is essential when considering them for making investments.

 

 

Advantages

 

  • Low brokerage, sales commission, and advisory fees due to fewer transactions can significantly affect long-term investment returns.

  • Selling investments after a long holding period incurs a long-term capital gain whose tax rate payable is lower than that of a short-term capital gain.

  • One-time stock selection and no need to make changes or check prices make the strategy easy to implement and prevent the likelihood of making badly timed decisions.

  • Buy-and-hold is simple. It blends well with simple strategies like index fund investing and dollar-cost averaging. You would only require making a few choices or performing extensive research that makes this investing strategy easier.

 

 

 Disadvantages:

 

  • Investors should be capable of suppressing behavioural biases and emotionally dealing with the impact of the market downturns. Thus, the investors' risk tolerance should be high as the buy and hold is difficult to follow correctly.

  • As you hold your investments long-term, there is no limit to the possible losses if any adverse event happens in the stock or the company. Holding on non-performing or underperforming stocks for too long could cause investors to lose all their funds.

 

 

 

5. Things To Consider When Implementing Buy And Holding Strategy

 

Are you thinking of investing with a buy-and-hold strategy? Here are a few things worth considering:

 

  • Investors may fail to achieve good returns if their portfolios are concentrated in just one or two companies. This could result in higher risks if a specific company performs poorly. That's why investors must diversify their portfolios to lessen and reduce the risks linked with company or industry-specific events. 

  • Investors should be capable of dealing with the impact of the downturns and avoid making wrong decisions in a panic.

  • Even though you keep the securities for an extended period, you should still consider the price fluctuation and any related market news to avoid unlimited losses.

  • Keeping any investment for an extended period doesn't guarantee it will grow in value. Also, you miss out on market opportunities if you don't actively manage your portfolio.

 

If you are unsure which investment strategy suits you, seek independent financial advice. It will help you determine the best ways to attain your investment goals.

 

 

6. Frequently Asked Questions (FAQs)

 

 

What is The Buy and Hold Real Estate Strategy?

 

Besides bonds and stocks, a buy-and-hold strategy also applies to the real estate sector.

 

Here, the investors buy houses without flipping them. They usually take out a home mortgage to capitalise on the benefits of leverage.

 

 

How Long Should You Hold an Investment?

 

Buy and hold is a long-term investing technique that requires patience and waiting out bad cycles. Investors have their investments for at least 12 months to be considered a long-term investment.

 

However, if you look at portfolios of investors like Warren Buffett, you would find they held their investment stocks for 10-20 years or longer.

 

Investing a lump sum of money into a stock and keeping it for a long time while overlooking short-term fluctuations over long-term returns can give you multi-bagger returns, i.e., doubling and tripling their investments.

 

However, there is no guarantee for that, as the opposite could happen if you have purchased the wrong stocks. It takes great stock-picking skills to take advantage of this strategy.

 

Also, you incur less taxes on long-term capital gains than short-term ones.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above information is for educational purposes. All these options come with risk. This is not financial advice.

 

 

 

At What Point Do You Take Profits From Stocks?

 

Opposite to human nature, the best method to sell a stock is while it is on the way up, still progressing, and looking vital to everyone.

 

If you are wondering at what point you should sell a stock, you should take most gains from the stocks in the 20%-25% range. The 20% to 25% profit-taking zone depends on the stock's ideal buy point, which may differ from your price.

 

This is because growth stocks usually advance 20% to 25% after giving a break-out of a proper base, then drop and set up new bases. So, it is better to lock in your gains to avoid losing your profits as the stock corrects.

 

Shifting your investment into other stocks that have just begun a price run can help you compound those gains.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above information is for educational purposes. All these options come with risk. This is not financial advice.

 

 

How Do You Profit From Buy-And-Hold?

 

The buy-and-hold investing strategy offers an opportunity to navigate away from the tumultuous market fluctuations and capture long-term gains in your portfolio. This approach is applicable to a wide range of funds and stocks.

 

A well researched and diversified stock portfolio, which you plan to retain for an extended duration, aligns with the principles of buy-and-hold investing.

 

Additionally, investing in an index via the buy-and-hold strategy can effectively achieve your financial goals.

 

 

 

Should You Keep on Investing When The Market is Down?

 

If you have long-term investment goals, here are some compelling reasons to remain invested, even during challenging times:

 

 

1. Dollar-Cost Averaging is Impactful in Market Downturns

 

When investing a fixed dollar amount into the same investment monthly, you buy into the market irrespective of where prices are. It removes the tendency to "time the market" and invest speculatively.

 

Buying more shares at a lower price for the long term leads to more returns when the market rises again.

 

 

2. The Bull Phase Follows The Worst

 

To maximise your profits, it's advisable to invest when prices are at their lowest. While witnessing a market decline can be disheartening, you can be confident that brighter days lie ahead.

 

 

3. Purchasing and Holding a Diversified Investment Portfolio Helps Long-Term Investors

 

If you're saving for a major goal like retirement, buying a new house, or covering your child's college tuition, and this goal is more than five years away, there's a good chance your investments will bounce back.


Investors who steer clear of unnecessary and costly actions and hold onto a mix of stable, large companies for an extended period could achieve higher returns. (no guarantee)

 

 

 

What Stocks To Buy and Hold for 20 Years?

 

Buy-and-hold aligns with value investing. Such investors often use a fundamental analysis approach to find stocks whose price is low in comparison to the fundamental worth of the companies.

 

The ideal investment assets for a buy-and-hold stratgy can be stocks, index funds, and exchange-traded funds (ETFs). Both ETFs and index funds mimic the exact index composition they follow.

 

As global investors seek an alluring return profile of Australian equities amidst a challenging market outlook, there are many great ASX stocks to purchase and hold for the next decade.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above information is for educational purposes. All these options come with risk. This is not financial advice.

 

 

What Is The 1% Rule in Buy-And-Hold?

 

Any investment you make, you do it with an expectation to make money. Most of the investment return for real estate investors comes from rental income.

 

When seeking a profitable deal, it can take time to determine which exact real-estate property will yield a positive cash flow.

 

Fortunately, there is a method that can help you quickly determine the growth potential of a home. The 1% rule of real estate investing measures the investment property price against the gross income it generates.

 

To pass this rule, the monthly rent of an investment property must be equal to or not below 1% of the buying price.

 

The 1 per cent rule in real estate can serve as a reference point to establish the profit potential of a rental property. Landlords rely on this rule to evaluate their interest in an asset.

 

So, suppose you wish to purchase an investment property. In that case, this rule can be used to determine how the property will generate cash flow and find the right property for your investment objectives.

 

When your property sits vacant, you can apply the 1% rule to determine the appropriate monthly rental rate to charge.

 

 

 

Is It Better To Buy and Sell or Buy and Hold?

 

The buy-and-hold strategy could be the best investment if a steady but slow route to building wealth sounds attractive.

 

If you feel that "time in the market" is more significant than "timing the market," then a passive investing style like buy and hold could be perfect for you.

 

For those who feel it is challenging to time the market perfectly, but it is easy to hold on to a stock, buy and hold could be perfect for you.

 

The long-term returns you gain through the buy-and-hold strategy will be worth the short-term volatility expected in stock investing.

 

When deciding your investing strategy, you should settle on your time frame, risk appetite, and goals. Some investors may take considerable risks to get a big payoff. In contrast, others may have a short period to invest their money and yield returns.

 

Buy-and-hold is a passive and long-term technique better suited for investors with a lower risk appetite and a lot of time. It takes little skill or time, unlike other investing types. Select suitable securities, purchase them, and not sell them for extended periods.

 

 

How Do You Make Money From Buy-And-Hold?

 

The buy-and-hold is a passive, long-term investment strategy wherein the investor purchases and retains stocks for the long term.

 

It is a way to ride out any highs and lows in your stocks instead of trying to swing-trade the stock price movement.

 

There are usually two buy-and-hold investing options:

 

 

 

Do lump Sum Investing or Buy Your Investments All at Once 

 

The sooner you invest your money, the earlier you start earning, especially compound returns. (no guarantee)

 

 

Start an Investment Schedule Like Dollar Cost Averaging

 

This investing practice involves contributing a fixed dollar amount to an asset regularly. It enables you to enter the market, even with a small monthly investment amount.

 

For example, you invest $300 per month for a year in an index fund that comprises a range of stocks. When stock prices are higher, your $300 contribution will purchase fewer shares and vice versa.

 

Over a year, you will pay an average price for the investment. Therefore, you have lowered the chances of repeated purchases at peak values.

 

This approach allows you to begin investing early and capitalise on compound returns. However, dollar cost averaging doesn't assure you will pay less for your investments than a one-time buy.

 

 

7. Conclusion

 

Often, overconfidence might tempt you to trade frequently.

 

At the same time, fear of loss might cause you to stick to non-performing investments that don't support your investment purpose.

 

However, by being a more regular and long-term investor, a buy-and-hold strategy can help you consistently and confidently work toward your goals.

 

If you don't have a share trading account yet, consider eToro, used by many investors in Australia and worldwide. You can create an eToro trading account HERE.

 

eToro AUS Capital Ltd ACN 612 791 803 AFSL 491139. OTC Derivatives are speculative and leveraged. Not suitable for all investors. Capital at risk. See PDS and TMD

 

 

 

The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.


Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.

 

 

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