Is there ever a Perfect Time to Be A Buy and Hold Investor?
Here we discuss: 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 of 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 quicker.
On the whole, this is a myth for 95% of people, who wipe out there investments within a year or two.
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, if investing in a developed index, like the Dow Jones Industrials, the S&P 500 or even the higher performing Nasdaq.
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 really talks about Buy & Hold because Brokerages want you to buy & sell often so they get more trading commissions.
3 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 huge part. Screening for stocks to hold for the long term usually boils down to selecting fundamentally good 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
Stock To Buy and Hold
- NETFLIX (NFLX) – 70% return in the last 7 Months (May 2018)
- PayPal (PYPL) – 41% return in the last 11 months (May 2018)
- NVIDIA (NVDA) – 34% return last 6 months (May 2018)
- Google (GOOG) – 10% return last 4 months (May 2018)
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 on a yearly basis, if your stock has at least matched the performance of the index. You will also need to review the company outlook for the future and the financials to asses if the reasons you purchased the stock still hold true.
2. Buy and Hold ETF’s
Another strategy is to Buy and Hold ETF’s 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 U.S. giving you exposure to this industry.
Effort To Maintain an ETF Buy and Hold Strategy – Low
As most ETF’s 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 extremely low 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 really careful. You need to evaluate the costs involved. Mutual Funds usually have higher costs, due to the fact they are actively managed which can seriously punish you in the long-term.
Stick to Low-cost ETF’s.
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 stocks for your money. 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.
- 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, really 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 as you buy and sell infrequently
The Key Takeaway of a 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”.