What Is Buy and Hold?
Let me explain buy and hold to you directly: it's a passive investment strategy where you buy stocks or other securities like ETFs and hold onto them for a long time, no matter what the market does in the short term. As an investor using this approach, you carefully pick your investments but ignore daily price swings and technical signals. I've seen how legendary figures like Warren Buffett and Jack Bogle champion this method, saying it's perfect for anyone aiming for solid long-term gains.
Key Takeaways
- Buy and hold is a long-term passive strategy where you keep a relatively stable portfolio over time, regardless of short-term fluctuations.
- You, as a buy and hold investor, tend to outperform active management on average over longer periods, especially after fees, and you can defer capital gains taxes.
- Critics argue that you might not sell at the best times with this strategy.
How Buy and Hold Works
Conventional wisdom in investing tells us that over a long horizon, stocks generally outperform other assets like bonds. There's ongoing debate about whether buy and hold beats active investing, but one clear advantage is the tax benefits—you defer capital gains taxes on those long-term holdings. When you buy shares of common stock, you're taking ownership in a company, which comes with rights like voting on key issues such as mergers and electing board directors. If you're an activist investor with a big stake, you can influence management significantly, even pushing for board seats.
Recognizing that real change in companies takes time, committed shareholders like you stick with buy and hold. Instead of chasing quick profits like a day trader, you hold through bull and bear markets, bearing the risks of failure or reaping the rewards of major growth. Remember, buy and hold is also known as position trading.
Active Versus Passive Management
The discussion between passive and active management continues, and as a buy and hold investor, you're embodying passive management. For mutual funds or ETFs, this means mirroring benchmarks like indices. These portfolios rebalance with market cap changes, keeping turnover low—often under 5% for something like an S&P 500 fund—as managers focus broadly rather than trading frequently. Stocks stay in the portfolio as long as they're part of the index. Even so, you need to watch price fluctuations and monitor performance, even if you're holding long-term.
Real World Example of Buy and Hold
Consider this practical example: if you bought 100 shares of Apple (AAPL) at $18 per share in January 2008 and held until January 2019, when it reached $157, you'd see a nearly 900% return in just over a decade. Critics of long-term strategies say you miss gains by enduring volatility instead of timing the market or locking in profits. Sure, some pros succeed with short-term trades, but the risks are higher. Ultimately, success comes from loyalty, ownership commitment, and simply staying put in your position.
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