There are many strategies that people employ when investing in the stock market. One of the most commonly used strategy is ‘buy and hold.’ In this article, Robert Janitzek guides us on the basics of the ‘buy and hold’ strategy.
What Is Buy And Hold?
‘Buy and Hold’ involves an investor buying stocks and holding them for as long as possible,
regardless of market fluctuations. In this strategy, the trader actively selects stocks but once in a position, is not concerned with short-term price movements and technical indicators. Wise investing dictates that a long time horizon would translate to higher returns than other asset classes. This strategy comes with tax benefits because long term investments are taxed at a lower rate.
Robert Peter Janitzek explains that a buy and hold strategist believes on the notion that market timing does not work and attempting such will yield a negative result. The investor takes into account the volatility of the market. In buy and hold, the investor will never see their returns if they bail out after a decline.
Reasons For The Strategy
The ‘buy and hold’ strategy is based on the efficient-market hypothesis (EMH). When securities are fairly valued at all times, there is no point in trading. However, some buy-and-hold advocates take this strategy to the extreme believing that a security should never be sold unless there is a financial emergency.
In some cases, an investor resorts to buy-and-hold on the basis of cost. When trading on the stock market, there are certain fees such as brokerage and bid/offer spread that will be incurred on all transactions. With all other things being equal, buy-and-hold will involve the fewest transactions. Taxation laws can also have an impact on a trader’s decision to buy-and-hold. Taxes apply on stocks only when they are sold.
The Volatile Market
It is often believed that a highly volatile stocks will turn over more frequently than a lowly volatile market. While this may be true, it is also likely that a high-risk stock may not even survive a 20-year period than a low risk stock. For this reason, buy-and-hold investors prefer blue chip stocks when engaged in stock market trading. For instance, it is unlikely that Coca Cola or Johnson & Johnson will go out of business in 20 years. These companies can survive major downturns and rebound big on their shares.
Before considering buy-and-hold, evaluate the situation and your experience first. While it may work for others, it may not be applicable to you.