Buy and Hold (Investing Strategy) - Explained
What is a Buy and Hold Strategy?
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Table of ContentsWhat is a Buy and Hold Investing Strategy?When is a Buy and Hold Investment Strategy Used?Benefits of Buy and Hold InvestingActive Versus Passive ManagementReal World Example of Buy and Hold
What is a Buy and Hold Investing Strategy?
Buy and hold refers to a passive investment strategy where the investor tends to buy stocks and hold them for a long time irrespective of the market fluctuations. The person who is ready to invest in buy and hold investment strategy has nothing to do with anything that is covered in short-run (price fluctuations, technical factors, etc.). Even affluent investors like Warren Buffet consider buy and hold approach favorable for investors who look for big returns in the long-run. Key Points:
- Buy and hold strategy refers to a passive investment strategy where the investor can buy a security and hold it for a long period of time irrespective of market fluctuations occurring in the short-run.
- Under buy and hold strategy, one can receive tax advantages by deferring taxes on capital gains on investments made in the long-run by holding instead of selling.
- As per the critics, buy and hold investors compromise with gains by successfully handling the volatile markets, instead of locking in profits.
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When is a Buy and Hold Investment Strategy Used?
Shareholders who understand that it takes a significant amount of time for change to take place, follow buy and hold approach. Instead of considering ownership as a short-term thing, such investors tend to hold stocks and shares in two types of markets: bull and bear. Therefore, equity stakeholders take the responsibility of either incurring losses or receiving amazing returns.
Benefits of Buy and Hold Investing
As per the traditional approach of investing, equity offers more returns as compared to any other class of assets including bonds. However, experts debate till date if buy and hold strategy yields more returns than active investing strategy. Considering the tax aspects, buy and hold strategy offers tax advantage to investors, and they receive exemptions on the capital gains earned for long-term investments. When you buy shares of a company, you get its ownership. The benefits that come along with ownership involve voting rights, and having a share in the company's profits as it progresses. Shareholders get the ultimate power of decision making, and their quantum of votes is equivalent to the amount of shares they own. They get the authority to make decisions for crucial issues including mergers and acquisitions, voting for directors and CEO of the company, and a lot more. Activist investors who have specific holdings can influence the management of the company, and can aim to get recognition on the board of directors.
Active Versus Passive Management
There are two styles of management: active and passive, and the debate over which style is better is ongoing. An investor who prefers buy and hold strategy prefers a passive management style. With rebalancing of indices and increase in weighting with respect to market capitalization, turnover rates tend to be very low because managers invest their energies in resolving issues in the wider market. One can hold stocks until they are a part of indices.
Real World Example of Buy and Hold
One of the best examples for understanding the concept of buy and hold strategy will be the purchase of Apple stock. If an investor invested in 100 shares of Apple at $18 per share in 2008, and held it till 2019 when the stock price rose to $157, he/she would have got a return of around 900% in a time period of 10 years. Critics say that people who invest in long-run investment strategy cannot understand the market timing. Short-term investment strategies have proved to work for many experts, but the risks associated with them are more. To be successful in making a right investment decision, you need to be loyal and committed to the company's ownership, and should not prefer leaving the selected place.