The buy and hold strategy refers to an investment move requiring investors to hold on to their stock for a long period of time rather than getting involved in daily trading. The theory behind buy and hold is that, in the long term, most investments end up providing a good return, even if they seem to decline over short periods of time. Buy and hold is the preferred system of investment for small investors who are looking for a way to save and avoid engaging in the "quick system" of buying and selling according to market timing.
People who use the buy and hold strategy usually buy stocks and bonds to build their portfolio. The investment products are most likely purchased from respected companies that have a proven track of success and are "here to stay." This can mean anything from Coca-Cola shares to Internet stocks. One key factor in selecting which companies to invest with is knowing who will be around long-term.
Building a Portfolio
The best
investment options
for this long-term strategy include those that have the ability to increase in value over extended periods of time, such as stocks. Accordingly, buy and hold investors do not concentrate exclusively on stocks, as there are many options for building an investment portfolio. Besides stocks, many investors purchase long-term bonds and hold on to them for several years; a common practice is to build a portfolio that consists of 60 percent stocks and 40 percent bonds.
Another option is to buy real estate property, which is popular because real estate is generally known to increase in value over time. In fact, the average US home usually increases in price more than 500 times over a period of 20 years, making property one of the best investments strategy in the market.
Benefits and Disadvantages
One of the main benefits of a buy and hold strategy is the easiness of the process. Investors using this tactic do not have to worry about the daily fluctuations of the market, and only need to sell if and when their self-imposed deadline approaches. A buy and hold strategy also has tax benefits, as the government offers reduced rates for long-term investments.
The main disadvantage of the buy and hold strategy is that many investors do not know when to sell. While it is true that most stocks can be held for a long time, many do peak, at which point the investor should either sell or diversify his portfolio. Another disadvantage is the possibility of an economic crisis, such as the one experienced in 2008. A major downfall in the economy can affect even long-term investments, especially if the crisis happens shortly before the investor planned to sell the assets.