Is Buy and Hold A Good Strategy & How You Can Do It?

What is Buy & Hold Investing? What are the 3 Ways to Buy & Hold? What are the 5 Key Advantages of Buy & Hold Investing for the Long-Term?

What is a Buy and Hold Investor?

A Buy & Hold Investor is a long-term investor who wants to accumulate assets and income over a 10 to 40-year time frame, with the minimum effort.

In recent times Buy & Hold has become unfashionable, with the get rich quick culture preferring to enjoy the adrenaline of day trading with high leverage Foreign Exchange (Forex) or contracts for difference (CFD’s) with the idea that they will get rich quick.

On the whole, this is a myth for 95% of people who wipe out their investments within a year or two.Buy & Hold Stocks

Buy & Hold Investors Always Win

The fact is that Buy & Hold investors always win over the long-term.

There has never been a 20 year period since 1945, where a Buy & Hold investor has not made significant gains.

But you are guaranteed to win only if investing in a developed stock market index tracking fund (ITF/ETF), like the Dow Jones Industrial Average (DJ20), the S&P 500, or even the higher-performing Nasdaq-100.

20 Year Stock Market Returns - S&P500 vs, DJiA vs Nasdaq vs Nikkei 225 vs UK FTSE 100 vs German DAX
20 Year Stock Market Returns – S&P500 vs, DJiA vs Nasdaq vs Nikkei 225 vs UK FTSE 100 vs German DAX

However, you need the mindset to Buy and Hold even through economic downturns and crises. As a young investor, time is definitely on your side, and this is your key advantage.

No one talks about Buy & Hold because Brokerages want you to buy & sell often, so they get more trading commissions.

5 Key Advantages of a Buy and Hold Strategy

Dollar-Cost Averaging & Compounding.

If you set aside a regular amount every month to invest in an Index Tracker or Index ETF when the prices are higher, you buy fewer stocks, and when prices are lower, you get more shares for your money; this is called Dollar-Cost Averaging. Compounding this over the long term brings better returns.

Dividends

If you invest in dividend stocks, you can also receive a steady quarterly cash income.  If you want to get an almost guaranteed return on your investments through dividends, then you are investing for a regular income, as dividends can be paid out yearly, quarterly, or even in some cases on a monthly basis.  Investors who specifically seek to make their profits from dividends are often referred to as Income Investors.

Dividends with Tax Benefits

Buying dividend stocks and holding for the long term means you will pay less tax as your dividends will be “Qualified,” meaning they qualify as Capital Gains Tax, not income Tax, meaning at the lowest Tax Band a Tax of 0% – we all like zero tax.

Dividend Reinvestment Plans (DRIPS)

Many companies offer a dividend reinvestment plan where you can reinvest your dividends for more shares, get a discount on extra shares you buy and even defer tax for 20 years, or until you sell the stocks.

Right and Wrong Time to Start.

Of course, it would be ideal to start your investing at the bottom of a market crash, but contrary to popular belief, no one knows when that truly is. So, any-time is good to start. If you invest at the top of the market and it crashes, your next monthly investment will buy stocks at bargain prices.

Lower Trading Costs

Compared to trading, buy and hold is much cheaper.  Despite the rise of USA Commission Free Brokers, most of the world’s investors still have to pay for stock trades.

3 Great Ways to Buy and Hold

1. Buy and Hold Individual Stocks

When you think about the buying and holding strategy, the immediate thought is which stocks do I target for long-term growth. This is where stock screening plays a considerable part.  Screening for stocks to hold for the long term usually boils down to selecting fundamentally sound companies.

This usually means stocks with:

  • Good long-term profitability
  • Low Debt to Equity
  • Strong Market Leadership & Dominance
  • Strong Market & Revenue Growth
  • A Track Record of Paying Dividends
  • Low to Medium Price to Earning Ratio

You have to remember:

The Stocks you purchase for long-term buy and hold strategies, need to be able to outperform the market.  If you cannot select the right stocks, you are better off buying an ETF or Index Tracking Fund

The effort to Maintain a Stocks Buy and Hold Strategy – Medium

This may come as a surprise as usually “buy and hold strategies” are low maintenance.

But when buying stocks, you will need to review, at least every year, if your stock has at least matched the performance of the index.  You will also need to consider the company outlook for the future and the financials to assess if the reasons you purchased the stock still hold true.

2. Buy and Hold ETF’s

Another strategy is to Buy and Hold ETFs for the long-term.  Exchange-Traded Funds (ETF’s) allow you to buy a specific cross-section of an industry or index.

Examples of Buy & Hold ETF’s

  • Vanguard Total Stock Market ETF (Ticker: VTI) – Simply the largest ETF out there with $679 Billion Under Management – and covering multiple indexes replicating the performance of the Entire Stock Market
  • Vanguard Small-Cap ETF (Ticker: VB) – with $84 Billion Under Management this ETF seeks to invest in companies with a smaller capitalization with the expectation they will grow into giants in the future
  • Vanguard Financials (Ticker: VFH) – This ETF of $9 Billion seeks to invest in the Financial Services Companies in the US, giving you exposure to this industry.

Effort To Maintain an ETF Buy and Hold Strategy – Low

As most ETFs are diversified to a high degree, you will not need to do a lot of maintenance.  Just make sure the ETF has low costs, the VTI fund above has meager costs of 0.04%, and that the dividends are returned to you or reinvested on your behalf back into the fund.

3. Buy and Hold Mutual Funds

Another way to launch a Buy and Hold strategy is to purchase a mutual fund.

But here you have to be careful. You need to evaluate the costs involved.  Mutual Funds usually have higher fees, due to the fact they are actively managed, which can severely punish you in the long-term.

It’s best to stick to low-cost ETF’s.

The Best Stocks To Buy and Hold

It depends on what you are looking for.  Is it Long-Term Dividend Income or Growth Stocks.   Key stock in my Buy and Hold portfolio are:

  • NETFLIX (NFLX) – 10 Year Return 2716% – 571% Per Year
  • Apple Inc. (AAPL)  – 20 Year Return 8704% – 435% Per Year
  • NVIDIA (NVDA) – 20 Year Return 8604% – 430% Per Year
  • Google (GOOG) – 15 Year Return 2882% – 192% Per Year
  • PayPal (PYPL) –  5 Year Return 397% – 79% Per Year
  • Microsoft (MSFT) – 20 Year Return 482% – 24% Per Year

Buy and Hold Strategy – Remain Committed

If you get scared during a crisis and cash in, you will miss out on the bargains of a lifetime at the bottom of the crash.  Take advantage of Dollar-Cost Averaging (DCA).

As the King of Buy & Hold, Warren Buffet says,

Be fearful when others are greedy, and greedy when others are fearful.

He also reminds us that the best time to sell a stock is “Never.”

In short, the Best Time to be a Buy and Hold Investor is Always – And Yes It Is Still Cool.

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Podcast Is Buy and Hold Investing Still Cool

Is there ever a Perfect Time to Be A Buy and Hold Investor? Here we discuss: What is Buy and Hold Investing? What are the three ways to Buy and Hold? What are the 5 Key Advantages of Buy and Hold Investing for the Long-Term?

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Video: Stock Charts for the Long-Term Buy and Hold Investor

Stock Chart Tips for the Long Term Stock Market Investor

 

2 COMMENTS

  1. Are ETF’s in the US the same as Istocks (basket of stocks within the same industry) traded on the Toronto Stock Exchange?

    • HI Luiza, perhaps you mean iShares, the company who provide iShares is Black Rock and yes they are ETF’s

      thanks

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