Buy and Hold Investment Strategy

Buy and Hold is a popular investment strategy that is used by many professional investors. Here are some key features of it.

You don’t have to be an investor to hate losing money. Whether we had made the money and lost it, expected to make it and it didn’t come, or just hoped for it only for our hopes to be dashed, losing money leaves a dreadful taste in our mouth.

While investing, there are a myriad of strategies that investors employ in order to prevent losing their capital or the idea of making less money than they anticipated as a result of market volatility. One of the common investment strategies you would have heard of is the “Buy and Hold” strategy.

Also known as position trading, it refers to the process of an investor buying stocks and holding them for a long period of time without disposing them. The goal of buy and hold, is capital appreciation and it is based on the idea that the value of stocks or securities will gradually increase in value when left untouched for a long period of time as stock volatility only truly exists in the short-term.

Investors that propel the buy and hold strategy are of the opinion that holding is a much better strategy than attempting to time the market in order to buy lows and sell high.

“Time in the market is far more important than timing the market.”

Key features of the Buy and Hold strategy is that:

It is Passive

Buy and Hold is the dream of the “lazy” investor. It is entirely low maintenance and passive in nature. The investor simply waits on the asset to appreciate for a really long period of time.

A popular quote by Warren Buffett is, "Don't buy anything you wouldn't be willing to hold for 5 years." If you’re going to hold for 5years, it means you’re literally doing next to nothing for that period of time.

Minimal/Reduced Costs

Buy and Hold helps the investor reduce the running costs of investing in two simple ways. The first is that it requires less activity than many other strategies. Its passive nature literally has the investor watching and waiting without having to do as much as anything to improve his or her odds.

For this reason, trading costs are minimized thus enhancing the overall net return of the investment portfolio. The other advantage are the tax benefits that arise from it. One of such is that since the investor is waiting to the future by holding, he or she can defer capital gains taxes on long-term investments.

It Passively Employs Other Strategies

Buy and Hold by its very nature feeds from other strategies. One is the Naira-cost averaging where the investor holds his investments but also purchases more stock at different prices by the Naira.

It also feeds off from the concept of Efficient Market Hypothesis, where no it is assumed that no investor can ever have an edge by solely correctly analysing the market and is also bound by the same rules of information.

As logical as the Buy and Hold Strategy sounds, it is not entirely infallible. In our next post, we would review some of the criticisms of the Buy and Hold strategy.

Written by Lawretta Egba.