What is Buy and Hold Investing?
Buy and hold investing means you buy investments and keep them for a long time, even many years. You believe the investments will go up in value over time. You do not try to make money buying and selling investments quickly.
Focusing on the Long-Term
When you use a buy and hold strategy, you do not worry about the day-to-day ups and downs in the price of your investments. You keep your eye on the far-off future. You trust that good investments will gain a lot of value in 10, 20, or even 30 years.
You have faith in the investments you pick. You are sure they will do well over the long haul. You have strong reasons for making each investment. And those reasons do not change from one day to the next.
Doing Careful Research
Buy and hold investors do not pick investments willy-nilly. They do not buy whatever is popular now. They do not follow fads.
Instead, buy and hold investors do a lot of research before putting money into anything. They want to deeply understand a company or fund before buying a piece of it. They look at many facts and figures to judge if an investment has a bright future ahead. This careful study is called fundamental analysis.
The Opposite of Market Timing
Some investors do the opposite of buy and hold. They try to time the market. They want to buy investments right before they go up and sell right before they go down. This means buying and selling very often. It is a ton of work and worry.
Buy and hold investors do not play this stressful game. Once they buy something, they sit back and relax. They let their investments do their thing. They trust the magic of time to grow their money.
The Benefits of Buying and Holding Investments
There are many good things about being a buy and hold investor. Here are some of the biggest pluses:
Less Stress and Worry
It is simple. Once you buy, you do not have to think about your investments all the time. You do not have to check prices every hour. No need to make hard choices to buy or sell each day. You can kick back knowing your investments are set for the long run.
Doing Better Than Many Investors
It sounds crazy but it is true. Investors who just buy and hold often do better than investors who trade in and out of the market all the time. Even many pro investors cannot beat the profits of patient buy and hold folks.
Why? Because it is really, really hard to time the market. Most people who try it wind up losing money. They sell right before investments soar or buy right before they tank. Ouch.
Paying Less in Taxes
In many countries, you pay taxes when you sell an investment and make money. This is called a capital gain. The tax rate can be pretty high if you buy and sell in under a year.
But guess what? If you are a buy and hold investor, you do not pay that tax much at all. You do not sell very often. So you avoid the taxman taking a big chunk of your profits. Your money can grow much faster when the tax collector is not grabbing it. Sweet!
Avoiding Lots of Transaction Costs
Buying and selling investments is not free. You often have to pay fees and commissions. All those costs add up big time if you trade often. It is like death by a thousand cuts to your wealth.
But buy and hold investors laugh at those costs. We hardly ever trade. So we pay way less in fees. More money stays snug in our accounts, growing away. It is a no-brainer.
When Buy and Hold Might Not Work Well
Buy and hold sounds awesome and it usually is. But sometimes it can bite you in the backside. Here are a few times when buy and hold might do more harm than good:
You Need the Money Soon
Buy and hold works best when your time horizon is super long. This means you will not need your invested money back for many years.
But life happens. Sometimes you need your cash sooner than you thought for an emergency or big purchase. If your investments are down when you need to sell, it can be painful. You may lose money doing buy and hold if you cannot hang on long enough.
The Investments Go Sour
One of the toughest things about buy and hold is that you must pick investments that will still be winners years down the road. This is easier said than done!
Companies that look strong now can turn weak and even go bust over time. Industries that are booming today could be old news tomorrow. Investments that seem so clever might turn out to be total duds. Even the smartest investors choose some stinkers.
If the investments turn rotten, all the buy and hold patience in the world will not help. It might be better to sell the losers and move on. But that is way easier said than done.
The World Changes Dramatically
Sometimes the whole world goes bonkers and all the old rules of investing go in the trash. This does not happen much, but when it does, look out below!
Think of huge events like world wars, revolutions, famines, and pandemics. Or massive changes like the creation of the internet or artificial intelligence. When everything is in upheaval, investments that once seemed safe can crumble to dust.
In crazy times, just buying and holding may not be the smartest move. But it is so hard to know! Often the wisest choice is to stay true to your long-term plan and ride out the storm. Gulp.
Some Famous Buy and Hold Investors
Many of the richest investors ever are big fans of buy and hold. Here are a few:
Warren Buffett: The most famous investor alive has summed up his approach as “lethargy bordering on sloth.” For decades, he has held many investments for years, hardly ever selling.
Benjamin Graham: This legend taught Warren Buffett how to invest. He once quipped that “the investor’s chief problem and even his worst enemy is likely to be himself.” Trying to outsmart the market is folly. Just buy great companies and hold ’em.
Jack Bogle: This genius created index funds so anyone can buy and hold the entire stock market easily and cheaply. He showed how most investors do better “standing still” than trading like crazy.
These amazing investors proved the power of buying and holding. Their wisdom and wealth are off the charts. We would be wise to follow their lead.
