Buy and hold investing is an investing philosophy that values long-term growth over short-term thinking. I know it doesn’t sound terribly sexy or exciting, though investing in the stock market really should be neither. There are those that say buy and hold investing is dead. They say you need to be able to make moves to stay ahead of the market. There may be times where you need to move quickly on an investment, though many times you simply need to keep the long-term view. That being said, the buy and hold approach is one that has been around for years and supported by many.
Buy and hold investing can apply to stocks, mutual funds, bonds – pretty much anything within the investment landscape. What makes buy and hold investing unique is a buy and hold investor does not care about market swings. They will hold on to their 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 the philosophy.
Where Did Buy and Hold investing 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. 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
- You feel less urge to get out of the stock market in periods of turmoil
A tried and true buy and hold investor will say 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?
The lower trade costs is only the tip of the iceberg for the buy and hold investor. Taxes play a significant role in investing. The buy and hold approach, generally speaking, allows you to mitigate the role of taxes in your portfolio – thus allowing more of your money to work for you. This is also not to mention the benefit of not needing to pay attention to whatever is going on in the stock market as you continue to stick to your investment plan.
…And the Disadvantages?
The biggest selling point to the buy and hold strategy is also be the biggest disadvantage. I commonly hear the buy and hold strategy being mocked as the “buy and hope” strategy. When looked at logically, I believe this holds some water in today’s market climate.
The opponent to buy and hold strategy 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 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.
I saw this time and again when I worked in the online brokerage industry. Investors ignored their portfolios, thinking they were doing the right thing through the buy and hold approach only to see their portfolios to go up in smoke. This is where balance is needed.
What Do We Do Now?
Is buy and hold investing dead? 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 blindly investing in the stock market ignoring all else from there. That’s not to say you can’t invest in certain stocks for the long haul, but shouldn’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 on what everyone else is doing. If you do that, you will likely only lose out on gains you would’ve had if you stuck to your strategy. 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.
This is where the importance of regular portfolio reviews comes into play. The market goes up and down over the course of a given time period taking your portfolio along for the ride. This results in your asset allocation being off, potentially opening you up to greater risk. The tool I use to protect myself against problems like this is Personal Capital. Personal Capital offers a free portfolio analysis to help you stay on top of your investments when you don’t have the time to.
What’s your take on buy and hold investing? Do you think it’s dead or do you keep a long-term approach? How do you keep yourself from ignoring the white noise of the media to keep your investing wits about you?