Buy and hold is ideal for investors seeking to invest money long-term. Future-oriented portfolio strategies are particularly suited to investors with a long investment horizon. Another advantage of this strategy is that it is easier to deal with corrections in the financial markets than when following a short-term investment strategy. And unlike investors who buy and sell securities short-term and on a frequent basis, investors with a buy and hold strategy save on transaction costs (brokerage fees). This is in line with the famous stock exchange maxim that says “too much trend-chasing leads to the poorhouse”. You can find out more on this in our article «Chat with Sabrina: stock exchange maxims».
Long-term investors also benefit due to the fact that the value of stock markets has tended to rise in the past. Find out more in the article “Why shares are worthwhile”. Investors pursuing a buy and hold approach do not have to worry about getting the timing of buying and selling on the stock markets right, but instead put their faith in the opportunities on the financial markets for positive performance over the long term.
Buy and hold – a long-term strategy pays off
Buy and hold is a popular investment strategy. It means investors keep their securities in a custody account long-term, instead of actively trading them on a regular basis. It is a passive investment strategy that aims to benefit from the long-term success of an index or a company and its shares. There are three key points to consider however for the successful management of your portfolio when adopting the buy and hold approach. Placing trust in positive performance over the long term is not always justified.
Focus on solid companies and avoid hype securities
However, anyone adopting a buy and hold strategy still needs to keep an eye on the stock market, even though their approach is not based on daily prices. Even people investing long-term have to keep tabs on key developments concerning the markets and companies Otherwise they run the risk of missing significant market events or company developments and making the wrong decisions or failing to identify the potential of certain shares or ETFs – whether positive or negative. Selecting the right shares and ETFs is key to a successful buy and hold strategy. Investors pursuing a passive, long-term strategy should invest in securities that are actually expected to perform well over the long term. Companies that focus on short-term hype or trends and/or have high-risk business models offer little prospect of success as long-term investments. Investors should focus on companies with a solid foundation, a sustainable business model, a strong cash flow position and crisis-proof growth. Even though these companies generally achieve slower growth than spectacular in-trend securities, they usually offer greater stability over the long term and better opportunities to generate returns.
Keeping well informed is always advisable regardless of the investment strategy selected. By doing so, you are well placed to decide whether to continue to invest despite a flat price trend or even a downturn. Anyone pursuing a very active strategy should keep track of developments daily or weekly, depending on the style of investment. Investors adopting a buy and hold strategy don’t generally need to check prices on a daily basis. However, regularly reading the press and company publications is essential. Even long-term investors can’t afford to miss the right time to sell. Buy and hold investors should determine their strategy in line with their goals and requirements and then decide to sell their shares or ETFs once their price targets – in an ideal scenario – have been met.
Only pursue a buy and hold strategy if this is in line with your investor profile.
To many new investors, buy and hold may sound very logical and easy to do. This style of investment is nevertheless not suited to all types of investor or to achieving all goals. Investors who are willing to assume high risks in the short term, track developments and prices on the markets daily one way or another or who can easily follow short-term hype and trends and trade strictly according to the principle of safety first, may be better off with more frequent tactical switches to their portfolio. Buy and hold will probably not generate speculative, rapid or exceptionally high returns – but that’s not the aim of the buy and hold strategy either. As outlined above, the goal is to invest in shares or ETFs that hold out the prospect of strong performance over the long term.
Some people see that as a disadvantage whereas others are not looking for the next Google, Coca Cola or Amazon in any case and prefer to invest cautiously in proven securities. However, these investors also need to remember that buy and hold only works if they are not likely to be unsettled by temporary downturns or uncertainty on the markets. Generally speaking, buy and hold is an investment strategy worth considering for anyone who does not have the time or inclination to check on their assets every day. A passive strategy provides exciting opportunities for investors to make the most of their money, especially those who have a long-term investment horizon.