Buy-and-Hold Investment Strategy Explained

With the buy-and-hold strategy, investors hang onto their investments for a long period of time in hopes of long-term growth. Buy and hold is considered a passive investment strategy. Investors who use buy and hold don’t act on market fluctuations. Instead, they choose certain stocks and hold onto them, giving them the opportunity to recover from short-term setbacks.

Here’s a closer look at what buy-and-hold investing entails.

What Is Buy-and-Hold?

A buy-and-hold strategy is a type of passive investment strategy in which investors buy equities and other securities such as mutual funds, index funds, and exchange-traded funds (ETFs), and hold on to them for a longer period of time.

Buy-and-hold investors generally commit to holding investments long-term despite the short-term market volatility that may come up along the way. They anticipate that a long time frame may allow them to ride out short-term dips in the market.

There is evidence to support this view. For instance, the S&P 500 annual average return is around 10% (about 7% when adjusted for inflation). While the stock market is ultimately unpredictable — and in some years the returns may be lower and in others they may be higher — this suggests that investors who hold their stocks for a decade may come out ahead.

How Does It Work?

A buy-and-hold investment strategy is relatively easy, which can make it a possible investment strategy for beginners.

With buy and hold, you buy stocks or other equities and hold onto them. In other words, you don’t sell them. The strategy behind buy-and-sell investing is that if you hold onto assets long enough, even if there is volatility in the market, the assets may gain value.

This is why many buy-and-hold investors choose to invest in shares of companies that are performing well and that have sound business principles. Their hope is that these companies may produce solid returns over time.


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Active vs Passive Investment Management

How long should you hold stocks? Two schools of thought on this are active vs. passive investments.

An active investment strategy is one in which money managers evaluate investments on a daily basis, potentially buying and selling stocks in the short-term as they attempt to find value.

For example, they might be pursuing a buy low, sell high strategy. While it may be possible that some money managers are able to outperform the market, critics say it is more likely they will be unable to beat it.

Passive investment strategies, on the other hand, typically seek to mirror an existing index, such as the S&P 500 or the Russell 2000. Portfolios are typically created through buying the stocks (or most of them) that already exist in the index.

That way, as the index rises and falls, theoretically, so too does the portfolio. And the idea is if investors hold on to the portfolio long enough, it may gain in value.

Benefits of Buy-and-Hold Strategy for Long-Term Investors

There are a number of benefits to practicing a buy-and-hold investment strategy from its simplicity, to tax savings, to avoiding emotional investing.

Simplicity

As a result of its passive nature, the buy-and-hold strategy can mesh well with investments such as low cost index funds that track an index and provide investors with a diverse basket of investments to help them build their portfolios.

Taxes

When investors sell a stock, they may owe taxes — known as capital gains taxes — on whatever gains that stock has made in value. The amount they pay depends in part on how long the investor held the stock.

Stocks held for a year or less before they are sold are subject to the short-term capital gains tax rate, which is equal to the investor’s income tax rate. Stocks held longer than that are subject to the preferential long-term capital gains rate. Investments held with a buy-and-hold strategy typically fall into this latter category.

Other Savings

Buy-and-hold investing might save investors money in other ways. Investors may incur fees when they buy and sell stocks and other securities. If the investor pursues an active trading strategy with frequent buying and selling, these fees can add up quickly. Infrequent trading in a buy-and-hold strategy minimizes these costs.

Protection From Emotional Investing

Emotional investing is the tendency for investors to make decisions based on emotions like fear or greed. For example, when markets are down, investors may panic and pull their money out of the market. Doing so can lock in losses and mean missing out on subsequent market rebounds. Conversely, an investor might see a particular stock doing really well and buy it when it is potentially overvalued.

This tendency to follow emotions over rational thinking can lead investors down a path that ultimately derails their investment plans. A buy-and-hold strategy can help combat this tendency.

If an investor knows they won’t be selling a stock for years or even decades to come, they don’t have to worry about making decisions to buy and sell in the short-term, even when market conditions get tough.

Avoid Market-Timing

Figuring out the best time to jump in and out of the market is hard, even for the most seasoned professionals. It typically requires a lot of research and the experts often don’t get it right. By nature, a buy-and-hold strategy avoids timing the market. It also aligns neatly with another anti-market-timing strategy known as dollar-cost averaging.

Investors who practice dollar-cost averaging buy a fixed dollar amount of stocks or other securities on a regular basis no matter the share price. When prices are up, aka when stocks are expensive, the investor buys fewer shares.

When prices are down and stocks are cheaper, the investor is able to buy more shares. Because dollar-cost averaging places the focus on a regular amount of money rather than share price, there is less temptation to time the market, which can be helpful if you’re new to investing. At the same time, the investor is able to continue to build their long-term portfolio.

Drawbacks of Buy and Hold

There are also some risks and drawbacks to a buy-and-hold strategy.

Ties Up Money

A buy-and-hold strategy is relatively inflexible. Investors park their money in the market and then they don’t touch it for years.

As a result, there may be some opportunity cost involved, as money that’s tied up in the market theoretically shouldn’t be used for anything else. This is ultimately the point of buy-and-hold strategies, but investors must be careful not to be tempted to pull their money out of the market and use it for other reasons.

Market Risk

Buy-and-hold investing does not make investors immune to market risk, the risk that they will experience losses as a result of movements in the market at large. It is possible that markets could crash just as an investor is ready to take their money out of long-term investments — if they’re ready to retire, for example.

A diversified and properly balanced portfolio may help investors avoid taking on too much market risk in any one sector or asset type.

Holding Duds

A stock or fund that consistently underperforms can end up in a portfolio. And if investors aren’t careful, the buy-and-hold strategy may mean that investment sticks around for a long time.

That’s why it’s important for investors to get a good look under the hood before they buy individual stocks or funds. Understanding exactly how a company is run or how a fund is managed can help investors decide whether it is a good fit for them.

Additionally, regular check-ins can help investors keep tabs on investments. An app that tracks all your finances may be helpful with this. If after a lengthy period of time an investment seems to be a poor fit, investors may want to consider swapping it out for something that is more in line with their investment plan and goals.

Who Is Buy and Hold Good For?

Successful financial plans are built with an investor’s goals, time horizon, and risk tolerance in mind. When considering short-term vs. long-term investments, a buy-and-hold strategy works best for investors that have long time horizons.

This may mean they have large long-term goals like saving for their child’s education or their own retirement.

The long time horizon gives investors the chance to ride out short-term market volatility while capitalizing on whatever long-term gains their portfolio makes.

Near-term goals and short time horizons may not be suited to a buy-and-hold strategy.

For example, if an investor is saving to buy a new car in the next three years, buy and hold may not make sense. Rather, that investor may consider putting their money in a savings vehicle that avoids market risk, such as a high-yield savings account.

Real Example of Buy-and-Hold Strategy Use

To illustrate how buy and sell might work, let’s say an investor bought stock in a company in 2018 for $18 a share and held onto it throughout ups and downs in the market. Ten years later, the company is doing so well that the stock price has risen to $157 a share. That’s a return for the investor of almost 900%.

In this example, the buy-and-hold strategy worked very well. But that may not always be the case. An investor could end up choosing a stock that underperforms, which is one of the potential drawbacks of buy and sell — and why it’s critical to do your homework on a stock before buying it.

Choosing the Right Assets for Your Buy-and-Hold Portfolio

When choosing assets for a portfolio, buy-and-hold investors tend to look for companies with strong business fundamentals, a solid management team in place, and a proven record of earnings. These investors also look for companies with good potential for revenue or profits.

It’s important for buy-and-hold investors to do thorough research on a company and the way it’s run, before they invest. And, as noted earlier, it’s equally important to do regular check-ins on the investment to make sure it continues to be the right fit for an investor’s portfolio.

With that all in mind, it can also be a good idea to keep the principles of diversification in mind when investing with a buy-and-hold strategy. That can help further hedge risk in your portfolio, and keep you overall risk profile in line with your investment strategy.

The Takeaway

In many ways, a buy-and-hold strategy is a way to set it and forget it. It’s that type of thinking that could help investors avoid panic selling stocks when markets are volatile. At the same time, portfolios are dynamic, and it’s a good idea to check up on them on a regular basis — quarterly or monthly — to determine if they need to be rebalanced.

If the stock market is doing well, for example, a portfolio may become overallocated to stocks. At that point an investor may choose to sell some stocks and purchase bonds, or simply pull back on buying new stocks in favor of new bond purchases. Regular rebalancing may help ensure that a portfolio stays on track toward meeting investment goals.

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FAQ

How long should you buy-and-hold?

There is no one right answer, as the decision on how long to hold a stock will depend on such factors as the company’s fundamentals, trends in the industry, and the investor’s financial goals. For instance, some investors may want to hold onto an asset until they reach retirement. Others might need money to pay for a child’s college tuition. Overall, holding onto a stock for a longer period of time may help investors ride out periods of market volatility.

What is buy-and-hold vs position trading?

Position trading is a long-term strategy of buying and holding an investment with the expectation that its value will increase. Position traders follow trends in the market, and they may buy and sell based on those trends. Buy-and-hold investors, on the other hand, are passive investors who buy a stock and simply hold onto it for years.

Is buy-and-hold risky?

There are risks to a buy-and-hold strategy. For one thing, this type of investing ties up money that can’t be used for other purposes. It’s also possible that an investor might end up buying and holding a stock that underperforms. Doing regular check-ins on your investments can help alert you to any stocks that may no longer be a good fit for your portfolio.

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