There are several strategies you can use when you’re investing in stocks and one of them is a buy and hold strategy. The buy and hold strategy involves buying a stock and holding it for a long period of time, i.e. several years. In days past, buy and hold meant until you reached retirement or achieved some other big financial goal. Today, experts disagree whether buy and hold is still a valid strategy. If you do a search for “buy and hold strategy” you’ll probably see results saying both “Buy and Sell is Alive” and “Buy and Sell is Dead”. The stance you take largely depends on your investment goals and risk tolerance.
The Argument Against Buy and Hold
Experts who argue against buy and hold strategy say that the market isn’t the same as it was 40 or 50 years ago. They say technology changes much too often for any company to be stable years, much less decades from now. The dot.com bust and the recent real estate bust are examples of why the buy and hold strategies might not work. However, certain stocks, like GE for example, have rebounded from the damage that was done after the most recent stock market crash resulting from the real estate bust.
The Argument For Buy and Hold
Proponents of the buy and hold strategy say that market timing doesn’t work, that you can’t predict when stocks are going to rise and fall. Of course, there’s at least one theory – the Elliott Wave theory – that says differently. The Elliott Wave theory says that markets follow certain patters and if you can tell a stock’s current place in the pattern, then you can estimate its next move, whether that be up or down.
Why They’re Both a Little Right
Of course, buy and hold doesn’t necessarily mean you’ll stick your money in any investment, put your head in the sand, and come up only when you’re ready to pull the money out for retirement or whatever financial goal you’re working toward (unless you’re a lazy investor). Instead, you’ll still watch the stock and pull your money out of a sinking ship before it totally goes under. In other words, you still want to cut your losses if it looks like a stock isn’t performing well and you don’t believe it will turn around before tanking. So maybe the strategy is to buy-and-watch-and-sell-if-necessary-otherwise-hold.
When you’re using a buy and hold strategy, you have to choose your stocks carefully. If you plan to hold stocks for a long time, it’s better to choose solid companies that you expect will be successful for a very long time. Blue chip stocks are a common safe choice, for example. Avoid investment bubbles which you can often spot when lots of investors are flocking to a certain type of investment. Those bubble stocks are the exact type that you shouldn’t use a buy and hold strategy for. Companies that pay dividends are even more attractive. It’s all about making an informed decision. Not every stock should be held for a long period of time.
Your ability to buy and hold partly depends on how long until you need the money. If you have a short-term need, even an emergency that you didn’t expect, you won’t be able to hold your investment for as long as you’d like. You don’t have to use buy and hold for every stock in your portfolio. You may have some stocks that you plan to trade in the short-term rather than hold on to them for several years.
Buy and hold is a good strategy for investors who don’t want to hire a stock broker or fund manager but who also don’t want to spend time trading various stocks and watching stock prices. It takes time to research companies, read their financial statements, do a SWOT analysis of the company, and all the other tests necessary to decide if a stock is worth buying. Buy and hold lets you do that work less frequently compared to if you were continually trading stocks.