Investment philosophies are as plentiful as grains of sand in the sea. Some are good, some aren’t so good. Few have been as staid as the buy and hold stock investment strategy. I am using the term “stock investing” loosely as it can apply to stocks, mutual funds, bonds…you get the point, I am meaning pretty much anything within the market landscape. What makes buy and hold investing unique is that by being a buy and hold investor you don’t care about market swings. You’re going to hold on to your stocks for the long haul expecting to get a decent return. While this may work at times, the wild market swings the last few years have called into question the validity of buy and hold investing.
Where Did Buy and Hold Come From?
Buy and hold investing has not been around for a terribly long time. The term was first used by Burton Malkiel, in 1973, in his book A Random Walk Down Wall Street. He believed that stock prices are random and not influenced by events in the past. There are also a number of buy and hold investors around today, namely Warren Buffett. Mr. Buffett has commonly been quoted as saying his holding period for a stock is forever and I think few can touch Mr. Buffett’s investment prowess. Most of us don’t have the funds at hand to take on the holdings Mr. Buffett can, but can we still be an effective buy and hold investor?
What are the Advantages to Buy and Hold?
There can be numerous advantages to buy and hold investing, including:
- It is cheaper due to fewer commissions paid
- It can be more tax beneficial as the IRS taxes long term gains at a lower rate
- Less stressful as you’re not beholden to market swings
A tried and true buy and hold investor will say that these advantages make the buy and hold strategy a good one to use. I love the fact that I would pay lower commissions by using the buy and hold strategy. What frugal person would not want a way to lower their costs? Add to that possible tax savings which allows me to keep more of my money as opposed to giving it to Uncle Sam and I am a happy camper. Perhaps the biggest selling point of all is the decreased stress from having to watch the markets and making snap decisions.
…And the Disadvantages?
The biggest selling point to the buy and hold strategy could also be the biggest disadvantage. I commonly hear the buy and hold strategy being mocked as the buy and hope strategy. Which, when looked at logically, does hold some water especially in today’s market climate. The opponent to buy and hold would point to the wild market swings as to why buy and hold investing is dead. I am sure that people who were holding stocks such as Lehman Brothers, Bear Stearns, or General Motors would now say that you can’t just buy and hold. Anyone who was simply following a buy and hold mentality in the Summer and Fall of 2008 unfortunately lost their shirts, and much more for that matter. All of this points to the biggest detractor of buy and hold investing, and that is it can kill your portfolio if not watched appropriately.
What Do We Do Now?
So, is buy and hold dead? Unfortunately, there is really no simple answer. In short the answer is both yes and no. In the truest sense, in today’s market climate, you’re playing with fire by simply following the buy and hold philosophy to the nth degree. That’s not to say you can’t invest in certain stocks for the long haul, but it can’t be done blindly. Today’s market climate requires us to be in the know on our investments and ready to act if need be. On the other hand, buy and hold is not dead because you can’t simply be tied to the market swings and make decisions based off of what everyone else is doing. If you do that, you’re very likely to lose out on gains you’d realize if you had a stronger investing stomach. In the end, the point I take from this is the importance of having an investment plan and sticking to it. If you love buy and hold, great, but do so with your eyes open. If you hate buy and hold, fine, but don’t chase after gains to spend a small fortune in return.
The market has taken a toll on many people’s investments, those who espouse buy and hold and those who don’t alike. Do you follow the buy and hold strategy, or are you more short term in your investment strategy?
Photo Courtesy of: Myles Davidson