Buy and Hold

What is Buy and Hold, or the Buying and Holding Investment Strategy

Buy and hold is a long term stock market investment strategy where one buys into an investment and doesn’t trade around the position, regardless of the market’s fluctuations. This is commonly regarded as a passive investment strategy, because once the investor has a position, he or she doesn’t trade around the position and is not concerned with short term fluctuations and random price movements. The theory behind a buy and hold investor is that the general market moves in an upward direction. This is true. Since the inception of the Dow Jones average, it has risen from 100 to over 13,000. So by buying and holding, one is profiting from the long term upwards trend in the stock market.

Some investors use the buy and hold strategy because they cannot properly predict the intermediate fluctuations. Since they cannot predict the short term fluctuations in the stock markets, they buy and hold (at least they won’t be prone to buying and selling at the wrong times). This viewpoint states that unsophisticated investors do not have the capability to short and the peaks and buy and the bottoms; thus attempting to do so has a bad influence on their investment performance. Thus, they believe it’s better to buy and hold. Another advantage of the buy and hold investment strategy is that one does not incur huge brokerage fees.

A well known buy and hold investor is Warren Buffett, who often buys shares in a company and doesn’t sell them for decades.

But here are my thoughts on buying and holding.

Remember how people used to tout about “buy and hold, the easy way to make money!”? Well I’ve got news for you. In this age, BUYING and HOLDING is DEAD.

Wall Street was telling the public

  • The trend is up! Buy and hold, and follow the trend! (By trend, they mean 100 year trend).
  • Buy on dips!
  • The easy way! Spend 5 minutes a day, and watch your portfolio increase!

Now this all sounded wonderfully beautiful. Any idiot could buy, hold, and in the long term, watch their investments earn passive income! But you want to know the problem with buy and hold? Let me tell you a story. Remember Enron? The company that went bankrupt? Now you could have bought Enron in the 1940s, and then, by 2003, watch every last penny on that investment disappear. Remember Lehman Brothers? If you bought that in 1893, and held it for 106 years, you would have lost all your money. Wall Street Says that the trend is up, which is true. The Dow Jones went from 100 to over 14,000. But you know what’s been discounted? A lot of bankrupt companies that once belonged to the Dow Jones Index. And trust me. Since the inception of the Dow Jones, not many companies are still alive. So if you buy and hold, prepare to go bankrupt.

Also, the average person who monitors his or her portfolio for 5 minutes a day does not have the emotional strenght to buy and hold, much less to buy on the dips. Remember 2008-2009? It felt like stocks were going to zero. The average investor sold at right near the bottom, where there seemed to be no hope left for the stock market. So instead of buying on dips, most people SELL on dips. So much for buying and holding.

Another big question about the buy and hold philosophy is “at what time and price do I buy?” Let me give you an example. If you bought the Dow Jones ETF 10 years ago, and held it up until today, your returns would have been 0%. Timing is crucial.

Buying and holding only works for the rich. Let me give you the 2007 mortgage crisis for example. Let’s say you bought stocks in 2005. Then the economic crisis came in 2008. You were out of a job. The only way to avoid foreclosure of your beloved home was to raise cash from whatever assets you have left. Hence, you sold your stocks portfolio (which conveniently, was already depressed by the stock market crash). What I’m trying to say is, buy and hold only works for those who are rich enough to not have ANY liabilities.

In these turbulent times, with the decline of the west, buy and hold is dead. It is no longer a century of stability. Hence, you can buy but don’t hold onto it like the Wall Street men are telling you to.

The opinions presented above are solely mine, and so not take them in without applying your own judgement to the buy and hold investment strategy.

7 Responses to “Buy and Hold”

  1. Khaleef @ KNS Financial August 3, 2011 at 9:45 am #

    I don’t think that all forms of buy and hold are dead. It never made sense to buy a stock and just hold it, hoping that it would rise in real value simply because of time.

    However, I do believe that buy and hold works if you understand long-term trends and buy when stocks are selling at low ratios. It’s really a mix of long-term timing and buy & hold!

  2. Robert @ The College Investor August 2, 2011 at 12:55 pm #

    I buy and hold regularly. My current College Investor portfolio has been the same since last year. But I also consider holding to be a period of 6+ months, and not years like many investors.

    • Tony Chou August 2, 2011 at 1:23 pm #

      Yep, that works. I know some very successful investors who often hold for up to a year. But for small guys like us, the long term (a few years) buy and hold doesn’t work.

  3. Ashley @ Money Talks August 2, 2011 at 12:26 pm #

    I can see that argument for an individual stock. And if you are buying individual stocks then you should be savvy enough to know how to research them and take the time to stay on top of your investments. But what about mutual funds? Those are designed to buy and hold… no?

    • Tony Chou August 2, 2011 at 12:39 pm #

      Maybe. I’ve never invested in mutual funds (as I don’t invest in funds), so I guess I shouldn’t voice my opinion on that.