Is the Buy and Hold Investment Strategy Right for You?

————————————————————————————————————————
Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
————————————————————————————————————————

investing buying and selling stock buy and hold stock investing strategy strategies

The following is a guest post by Tony Chou from Investorz’ Blog, where he teaches both novice and pro investors how to invest in the stock and commodities markets. Enjoy and be sure to get involved in the discussion by commenting below!

Is the Buy and Hold Investment Strategy Right for You?

Probably one of the best known investment strategies is buy and hold. Buy and hold is a long term investment strategy where one buys an investment and is not frightened by temporary fluctuations in the investment’s value. Buy and hold is frequently touted by the legendary investor Warren Buffett, and many mom and pop investors subscribe to this investment style because it’s a passive investment style. However, despite Warren Buffett consistently preaching about buying and holding, there is a secret that he didn’t tell you, because he doesn’t realize it. Buy and holding doesn’t work for everyone. It only works for the right people under the right circumstances.
What is the biggest difference between Warren Buffett and the average worker? Warren Buffett is financially independent, while you’re probably not. Warren certainly has enough money to live on for the rest of his life, while you probably don’t.
So, let’s assume that the Dow decreases from 14k to 11k. You believe that the markets are now wonderfully underpriced, so you decide to buy Buy BUY! But, what a lot of investors forget is that even though the markets may be oversold (and thus underpriced), they can be even more underpriced. But you say “no problem, I’ll just buy and hold”. So you hold and hold and hold. The recession gets worse, and you lose your job. In order to make ends meet at home and pay the mortgage, you’re going to have to sell your investment portfolio. Coincidently, the Dow is now at 8k. So you’re forced to sell (because you need to cash to survive), and your investment portfolio is left with a whooping loss.
My point is, Warren Buffett can afford to buy and hold. No matter how low the stock markets fall, he’ll always have enough money to live on. But if you, the average person, don’t have enough to live on for the rest of your life, then buying and holding might not be such a great idea.

The scenario I explained above is based on the assumption that the average investor has the foresight to hold onto his or her investments, no matter how frightening the markets sink to. But the truth is, 99% of all unsophisticated, mom and pop investors are prone to what is called “investor maniac.” The theory behind making money on the long side of the market is “buy low, sell high.” However, 99% of mom and pop investors do exactly the opposite. They get sucked into the excitement of a financial market bubble, and then sell when there’s a big financial panic. So although buy and hold can work, most unsophisticated investors don’t have the conviction to stick to it.

How about you all? Do you have any buy-and-hold investments? How have they done over the years? What investing strategy do you generally use to save? 


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • Howdy folks! Jacob here! Sorry I’ve been a little elusive on the blog as of late. I’ve been busy getting ready for my PhD Qualifying Exam next week (the report was due today, and currently, I am running on 2 hours of sleep).
  • Great topic here Tony! I absolutely agree that buy and hold only really works if you’re not directly depending on the money you’re holding to meet your living expenses or other near-term financial goals.
  • @ Confusion between the differences of buy-and-hold and a prudent passive retirement investing strategy – 
    • I think that often, people confuse the overly-simplified buy and hold investing strategy with passive investing. 
    • Although technically, buy-and-hold is a form of passive investing because it doesn’t involve timing the market, the proper way people are supposed to perform passive investing is through careful selection of an appropriate asset allocation coupled with periodic rebalancing.
    • Because of the rebalancing, passive investing, in the correct sense, is much better than buy-and-hold. 
  • @ Getting sucked in to the excitement of selling during market downturns – I definitely agree with the statement above that the majority of investors lack (and lacked during the 2009 financial crisis) the resolve to hold on to their investments through big dips in the market. Many people I know sold up to half of their holdings at the very bottom of the market, causing them to lose much money. In my mind, this just further affirms my belief that people should avoid risky individual stock selection, choose an asset allocation that will allow them to sleep at night, rebalance periodically, and stick to it! 

***Photo courtesy of http://www.flickr.com/photos/sercasey/324341982/sizes/l/in/photostream/

Comments

  1. jonelder57 says:

    It will always be a winning solution. I buy when the market is dropping, I buy when it's soaring. I buy buy buy and never sell. More people would retire at 55 if they followed this simple investing strategy!

  2. 20sfinances says:

    Great post – It's a new insight into my view of the market. However, I would also suggest that the average person should not be investing too much money without having an emergency fund. Investing for retirement, in the ideal situation, means not touching it until retirement. With that said, life happens some times.
    My recent post How I Furnished My Entire Apartment for $600

  3. At least buy and hold is working for me so far, I am getting decent dividend in the process as well!
    My recent post Don’t Be Stupid, Tips For A College Freshman

  4. Great to see what works for you guys, and what doesn't. 🙂
    My recent post My Outlook on the Markets #3

  5. IMO buying and holding, then, is the best option after you've become debt-free. (I'm 'allowing' myself to begin investing again once I pay my student loan off early next year, woohoo!)

    If I had continued investing these last few years I most definitely would have had to withdraw considering what I did to myself financially in 08-09, buy and hold doesn't take stupidity into account either unfortunately.
    My recent post August Adventures (monthly goals)

    • Sounds like a good plan Andrea. If you can pay off your student debt fairly quickly, it's all right to delay devoting money to other financial needs such as investing and credit card reduction. However, since the interest rates and terms on student debt is often quite favorable, student debt repayment can often be pushed down the account hierachy/priority order slightly.
      My recent post More Money and a Raise, Please!

Speak Your Mind

*

CommentLuv badge