What Is the Buy and Hold Strategy?
Definition and Examples of the Buy and Hold Strategy
The buy and hold strategy is an investment strategy in which the investor buys stocks and holds them for the long-term. In other words, the buy and hold strategy is about riding out any ups and downs in stock you own, rather than trying to swing trade the price movement.
Learn the full definition of what it means to employ the buy and hold strategy, along with some benefits and drawbacks.
What Is the Buy and Hold Strategy?
The buy and hold strategy of investing is when securities are held for long periods of time. A buy and hold investor believes that long-term returns will be worth withstanding the short-term volatility that's characteristic of stock investing.
The buy and hold investing strategy is in opposition to absolute market timing, in which an investor would attempt to buy stocks at low prices and sell them at high prices.
Buy and hold is a passive investing style. Put simply, buy and hold investors believe that "time in the market" is a more prudent investment style than "timing the market." It's extremely difficult to perfectly time the market, but it's easy to hold onto a stock.
How Does the Buy and Hold Strategy Work?
The actual function of the buy and hold strategy is extraordinarily simple. An investor simply picks a stock or ETF, buys it, and holds onto it for years—even decades.
Buy and hold is generally considered a long-term strategy, but the exact length that a security is held depends on why a person is investing. For example, someone using the buy and hold strategy for their retirement portfolio will hold stocks for decades until they decide to retire.
Passive investing through the buy and hold strategy aligns with the Efficient Market Hypothesis (EMH). This theory essentially states that all known information about investment securities (stocks, in this case) is already factored into the prices of those securities. This theory runs counter to active investing strategies that require an investor to use skill, knowledge, and independent research in an attempt to "beat the market." Under the EMH, an active investor cannot be any more effective than a buy and hold investor.
Not all buy and hold investors believe in EMH. The buy and hold strategy also aligns with value investing. Value investors often employ a fundamental analysis approach. They will attempt to find stocks in companies where the price is—in their opinion—low compared to the fundamental value of the company. Upon finding one of these stocks, the investor will buy it and hold it until something changes; either the price of the stock gets so high that the stock is worth more than the company, or the company changes its business model in a way that reduces its value.
Pros and Cons of the Buy and Hold Strategy
Lack of flexibility
- Cost savings: A key argument for the buy-and-hold strategy is that an investor holding for longer periods requires less frequent trading than other strategies. Therefore, trading costs are minimized, which can increase the overall net return of the investment portfolio. Even if your brokerage doesn't charge trade commissions, buy and hold investors still benefit from more favorable capital gains tax rates.
- Risk reduction: The passive investing approach reduces what is called "manager risk," or the risk that someone takes by actively managing their portfolio. In other words, by having a more passive investment strategy, you reduce the risk of human error.
- Simplicity: Buy and hold investing is a simple strategy, and it blends well with other simple strategies such as dollar-cost averaging and index fund investing. Investors who build a portfolio on these strategies don't need to make many choices or do much research. This largely automated approach saves time and makes investing easier.
- Price risk: Stock prices do rise and fall, and there's never any guarantee about when the price will return to what price. Buy and hold investors may not consider price as much as other types of investors, and that leaves them more vulnerable to buying stocks when they're expensive and selling them when they're cheap.
- Principal risk: Principal risk applies to most types of investment, especially when it comes to stocks. It essentially means that there's no guarantee your money will be there when you need it. The stock price could tank after you invest in a company without ever recovering—if that happens, then you lose out on your initial investment (also known as your "principal").
- Lack of flexibility: A perfect buy and hold strategy always buys and holds, regardless of market fluctuations. Sometimes, this can result in losses. A historic example includes the Great Recession and the accompanying bear market. During this volatile time for stocks, active traders made much more money than buy and hold investors.
- The buy and hold strategy is a form of passive investing in which someone buys securities and intends on holding them for years—even decades.
- The central idea of this strategy is that it's better to ride out any turbulence, rather than attempting to time the market.
- Buy and hold strategies may be used in conjunction with strategies like dollar-cost averaging.