Buy and hold is an investment strategy in which the investor buys stocks and holds them for the long term. In other words, this method is about riding out any ups and downs in stock you own, rather than trying to swing trade the price movement.
Learn more about the buy-and-hold strategy as well as the pros and cons.
What Is the Buy-and-Hold Strategy?
The buy-and hold-strategy is when securities are held for long periods of time. If you buy and hold, you may believe that long-term returns will be worth the short-term volatility that's common in stock investing.
Buy and hold is in opposition to absolute market timing. With that method, you would attempt to buy stocks at low prices and sell them at high prices.
Buy and hold is a passive investing style. Put simply, those who buy and hold feel that "time in the market" is more important than "timing the market." It's not easy to perfectly time the market, but it's easy to hold onto a stock.
How Does the Buy-and-Hold Strategy Work?
The buy-and-hold strategy is very simple. You simply pick a stock or ETF, buy it, and hold onto it for years. Or, you could even hold it for decades.
Buy and hold is most often a long-term strategy. But the exact length that you hold depends on why you're investing. For instance, if you buy and hold for your retirement fund, you may hold stocks for decades until you decide to retire.
Passive investing through buying and holding aligns with the Efficient Market Hypothesis (EMH). This theory states that all known information about investment securities (stocks, in this case) is already factored into the price.
This theory runs counter to active investing, which requires using skill, knowledge, and research in an attempt to "beat the market." Under the EMH, an active investor cannot be any more effective than one who buys and holds.
Not all buy-and-hold investors believe in EMH. Buy and hold 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, they 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 lowers its value.
Pros and Cons of the Buy and Hold Strategy
Lack of flexibility
- Cost savings: A key argument for the buy and hold is that holding for longer periods requires less frequent trading than other strategies. That means trading costs are minimized. This can increase the overall net return of the portfolio. Even if your brokerage doesn't charge trade commissions, you can still benefit from more favorable capital gains tax rates.
- Risk reduction: The passive investing approach reduces what is called "manager risk." This is the risk that someone takes by actively managing their portfolio. In other words, by having a more passive strategy, you reduce the risk of human error.
- Simplicity: Buy and hold is simple, and it blends well with other simple strategies such as dollar-cost averaging and index fund investing. If you build a portfolio on these strategies, you 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; there's never any guarantee about when the price will return to a certain price. If you buy and hold, you may not think about price as much as other types of investors. That could leave you more vulnerable to buying stocks when they're costly and selling them when they're cheap.
- Principal risk: Principal risk applies to most types of investment, especially when it comes to stocks. It means 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. This is also known as your "principal."
- Lack of flexibility: A perfect buy-and-hold strategy always buys and holds, no matter the fluctuation of the market. In some cases, this can result in losses. An example was the Great Recession and the accompanying bear market. During this volatile time for stocks, active traders made much more money than those who bought and held.
- 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.