Buy and hold Strategy

Buy and hold Strategy 

‘Buy and hold’ should not mean ‘buy and hope’ – Hans Hoogervorst,

“Buy and hold” investment strategy is a passive investment strategy. The investor generally holds the stock with a long term perspective and continues to apply until the end of the investment horizon. It is a long term investment strategy.  Here, investor continues to retain the stock and increase his wealth with the passage of time as growth stories unfold.  They do not look at daily price movement.

This popular strategy is used by Mr. Warren Buffet. Here, an investor believes that long-term returns can be reasonable despite the volatility characteristic of short-term periods. Here, investors believe in “time in the market” is a more important than “timing the market.” A buy and hold investing strategy will allow you to hold your securities through all volatile markets with the belief that, in the long term, your investments will still have value in the end.

 

Few other characteristics are observable

  • Buy and Hold strategy is essentially a fundamental analysis strategy. Here,  stocks are bought and sold based on fundamental strength of the company and its growth potential rather than price movement.
  • It is a passive investment strategy with no active buying and selling of inventories.
  • Since there are less of transactions, the transaction costs like brokerage etc. is less.
  • There is a fixed flow of dividend income. When a company grows bigger the dividend cash flow also grows. Dividend income across the world is usually tax free in the hands of the investor.
  • Generally in this strategy investor hold the stocks for the longer period of time. Across the world, Long term holding are either tax free or it is on a lesser side.
  • One should follow a strict valuation technique and due diligence.  Generally, in this strategy, investor follows the value investing principal.
  • There is a common believe that buy and hold strategy means buy and forget. However, would like to clarify that staying engaged with your portfolio is a must. It does not mean that one should lose sight of developments in your portfolio.  We understand that it is a long horizon call but, one should review holding from time to time.

 

Disadvantage

  • Generally it is long term trading strategy. There are different investment and interest rate cycle at different period of time. In this strategy, the investor may miss the opportunities to capitalize any such changes especially with rate sensitive and cycle stocks.
  • Regarding the tax regime too, there may be changes from time to time. Buy hold strategy failed to conform to such changes in the country’s tax structure. This particular item is very important as pure as a debt instrument is concerned.
  • In this approach, we always analyze the past performance and trust that it will replicate in future too.
  • Buy-and-hold strategy does not advocate small elements of timing, such as dollar cost averaging Due to this, the timing of the stocks is becoming very important. So it does not enable investors to purchase stock at low prices.
  • Buy and hold strategy does not work in all the asset class. In particular asset class such as commodity, Forex etc, usually it is the trading strategy which works.

 

Conclusion

In modern day, buy hold strategy concept has changed. Buy and hold strategy does not mean that buy and forget. One needs to look at his core holding and review the same form time to time.

 

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One Comment to Buy and hold Strategy

  1. […] Buy and hold Strategy ‘Buy and hold’ should not mean ‘buy and hope’ – Hans Hoogervorst, “Buy and hold” investment strategy is a passive investment strategy. The investor generally holds the stock with a long term perspective and continues to apply until the end of the investment  […]

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