Buy and Hold strategies.

Assume that is the year 1980, and you decide to invest $ 10K every year.

At the end of 1989 you would have ended up with $210,833.

source Yahoo Finance (finance.yahoo.com)

Now assume that is the year 1990, and you decide to invest $ 10k every year.

At the end of 1999 you’d have ended up with $280,019

This $70k more is purely the luck from investing in a decade of better returns!

source Yahoo Finance (finance.yahoo.com)

Now assume that is the year 2000, and you decide to invest $10k every year.

At the end of 2009, you’d have ended with a miserable $92,001.

source Yahoo Finance (finance.yahoo.com)

This explains why it’s simply impossible for you to predict the stock market performance.

Long-term Investing in an S&P 500 index fund for a certain period of time can have very different results, depending on if you are in a good or bad decade.

Many investors adopt a “buy & hold forever” strategy to avoid the perils of bad decades, so a bad decade (I.e. the 2000s) can be easily counterbalanced by the returns of the following years.

Adopting a Buy and hold strategy, If you invested $100 in the S&P500 in 1965, you would have $21,973.23 in 2021, assuming you reinvested all dividends.

This is an incredible return on investment of 21,873.23%, or 10.11% per year.

This investment result beats inflation during this period for an inflation-adjusted return of about 2,471.21% cumulatively, or 5.97% per year

The graph below shows the performance of $100 over time if invested in an S&P 500 index fund. The returns assume that all dividends are automatically reinvested.

The S&P 500 from 1965 to 2021

Start Value
Average monthly close
$86.12
End Value
Average monthly close
$3,278.20
Change in price+3,706.55%
+6.79% / yr
Change incl. dividends+21,873.23%
+10.11% / yr
Change, inflation-adjusted+2,471.21%
+5.97%
Final amount, nominal
($100 base)
$21,973.23
Final amount, inflation-adjusted
($100 base)
$2,571.21

The Buy & Hold Strategy

“Buy and hold” is a long-term passive strategy. Investors keep a stable portfolio over a very long time, regardless of every market fluctuation in the short term.

Buying and holding assume as condition the “Efficient Market Hypothesis” (EMH), which states that all known information about investment securities is already included in the price.

This theory is in contrast to “active investing”, which requires the use of analysis, skills, knowledge, and research in an attempt to “beat the market”.

Under EMH, an active investor cannot be more effective than one who buys and holds.

Buy and hold strategy has been proven to be successful by many studies and historical data, and this is one of the best investing strategies according to many of the greatest investors of all time such as Warren Buffet, Jack BogleBurton MalkielJohn TempletonPeter Lynch, and Benjamin Graham since, in the long run, there is a high correlation between the stock market and economic growth.

Buy & Hold Strategies to reduce costs.

Others have argued that buy-and-hold is a better strategy for purely cost-based reasons.

The costs, such taxes and fees, are incurred for each transaction.

The buy and hold strategy usually involves the least number of transactions for a constant amount invested.

Taxation law also has an important effect: Capital Gain Taxes for long-term investment, may be lower than those incurred from short term trading, and tax may be due when (and if) the asset is effectively sold

Buy & Hold Strategies, the best if you don’t have time.

Buy and hold strategies don’t need many efforts, or countless hours to spend in market analysis and researches, and can be the best if you are on the road to Financial Freedom.

One of the biggest drawbacks of the buy and hold strategy is that it will freeze large amounts of capital, for an indefinite period of time.

Like all investors, buy and hold investors should diversify to effectively protect their assets from market risks.

Conclusion. Pros and cons of buy and hold strategies

PROS

  • Extreme Simplicity:  investors don’t need to constantly monitor their investments. Once own a stock or a fund, you keep it for life.
  • Tax efficiency: If you do not sell your stocks, you avoid capital gains taxes on stock sales. Buy-and-hold investors can minimize their tax liabilities.

CONS

  • Can’t profit from market volatility opportunities: When the stock market has high volatility, is the best time to buy more shares. Market dips in stock prices are great opportunities for investors. But if you’re already fully invested in adopting a buy-and-hold strategy, you can’t have much capital to spend on short-term buying opportunities.

1 thought on “Buy and Hold strategies.”

  1. Hi
    Great read! Empirical data clearly is on the side of long term buy and hold. It is so obviously superior to timing the market, which in general is more risky. Buying quality stocks/ETFs at a fair price and then just sitting. time in the market is key, just letting the positions work.
    Cheers

    Reply

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