A Buy and Hold Strategy is a passive investing strategy for long-term investing with minimal trading in the market. Buy and hold assets for a long period of time regardless of fluctuations in the market.
Index investing is perhaps the most common form of passive buy and hold investing and is cheaper, less complex, and often produces superior results to actively managed portfolios.
Fear and Greed
We are naturally wired to buy when Equities are high and to sell when they fall. This is intuitive…but it is wrong! Unfortunately, fear of loss is greater than pleasure from gains.
If you sell when Equities fall, you are locking in a loss. If you then wait for Equities to rise before getting back in, you are locking in another loss! This is how most investors operate – timing the market. It is hardwired into our human DNA.
If the price of a dress/steak/car is offered on sale at half price, we rush to buy. If the stock market crashes by 50%, do we rush to buy? - or cry SELL!!
Put another way, do you wait for the price of houses to go down before you buy a house?
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
Volatility and risk disappear if you look over the long term. Investing in globally diverse, low-cost index funds is for the long-term growth of your wealth.
If you have a long time frame and are investing in your Equity portfolio every month, would you stop the direct debit if the market crashes overnight? NO! The stock market will bounce back and you are in the fantastic position of continuing to buy when it is on sale!
If you are fearful and couldn’t stomach a 30% fall in your Equity portfolio, this is when an allocation in Bonds will help calm the nerves.
Buy and Hold - Do Nothing and Win!
Buy and hold, or set and forget investing is easy – too easy! People think they should work hard, study hard, play the market, etc. to make money. Again, it is counter-intuitive to do nothing and win!
While active investors will tell you it’s possible to time the market and make a killing by playing stocks, the data seems to show otherwise. Fidelity conducted an internal study — a performance review of accounts between 2003 and 2013 to find which accounts did the best. They found that the best performing accounts were investors who were DEAD! In second place were investors who had FORGOTTEN they had accounts at Fidelity. Buy and hold investing is probably the easiest and safest bet for all investors.
A common mantra in investing is 'time in the market, not timing the market'. In other words, the best way to make money is to get in and stay invested in the market for the long term and take advantage of compound interest. Jumping in and out of the market and trying to time ups and downs rarely works out well. Buy & Hold. Set & Forget.
Have you got FOMO?
Don’t get seduced by FOMO – fear of missing out. The financial press is screaming in your ear “Everybody is making money buying (insert latest craze: Bitcoin/Meme stock/etc), don’t miss out!”. By the time you are reading about this, the top of the craze has usually been reached and is about to crash!
In the next instance, the financial press is shouting “A crash is coming, get out now while you can” creating FOHO – fear of holding on.
HODL! YOLO! These are the cries of the speculators, the gamblers, and the ‘pump & dump’ merchants. Social media can reach millions of people and affect the way they view the world. If you show an interest and a viewpoint in a certain direction you’ve probably noticed how quickly your social media streams fill up with more communications backing up this view. This can be used by unscrupulous/clever speculators to get you to HODL and YOLO (Hold on for dear life! or You only live once!) whilst they ‘pump up’ the price of an asset before selling at the top leaving those that have fallen prey to their messages nursing big losses.
Have a Financial Plan
Trying harder and doing more typically leads to better results in many aspects of your life. Study harder and you can get better grades. Put in more practice and you can improve at sports. Go to the gym on a regular basis and you can transform your body.
Investing doesn’t necessarily work like this. When the markets go haywire, often the harder you try and the more you do, the worse your results. It’s counterintuitive but true - and doing more is often even more damaging when it’s done at the worst possible times.
This is where having a financial plan plays such an important role. People with a financial plan tend to act in accordance with that plan; the plan guides their investment principles and hence portfolio construction. If the plan doesn’t change, the portfolio doesn’t change. People without a plan react to events or, via FOMO, chase past performance. Not only is this a ghastly way to live (imagine checking your portfolio positions every few minutes, every hour of every day), but it’s also a surefire way to destroy your wealth.
What is a Buy and Hold Strategy?
Buy and hold, do nothing, stay the course. I know this isn’t the sexiest way to invest, but for the vast majority of the population, it offers the highest probability of success. Being more rational requires the use of a long-term mindset. It requires patience, discipline, and the ability to ignore short-term fluctuations in the market. It’s not easy but it remains your best bet for surviving the inevitable market corrections.