This article will highlight the important pros & cons of buy and hold investing to give you an honest view of this strategy. With a buy-and-hold strategy, you are not simply buying a stock and holding it blindly forever. You should focus on one of three strategies; Growth Investing, Value Investing, or Income Investing.
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. The get rich quick culture prefers 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.
Overall, this is a myth for 95% of people who wipe out their investments within a year or two.
1. 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.
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.
2. Reaping Dividends With Income Investing
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, every month. Investors who specifically seek to make their profits from dividends are often referred to as Income Investors.
High Dividend Yield Strategy.
High dividend yield stocks are a double-edged sword. The higher the dividend yield, the harder it is for the company to keep paying the high dividend. Because the dividend yield is calculated by dividing the dividend payout by the stock price, the yield goes up as the stock price goes down. That is why you also need to pay attention to the dividend payout ratio.
Dividend Growth Strategy
Do you want to find companies that are continually raising their dividends? It is a wise move as businesses with significant dividend growth are usually growing sales and market dominance.
What if you could find companies that have experienced dividend growth over the last ten years and that on sale at bargain-basement prices by the stock market? This is called Dividend Growth + High Margin of Safety.
Compound Dividends with Monthly Dividend Paying Stocks
When you get paid in an income investment strategy is almost as important as how much you get paid. Income strategies are usually about creating a cash stream to face specific financial targets. This implies that each investor must build his own portfolio according to their needs so that dividends are paid WHEN needed.
However, some investors have other goals when buying dividend-paying stocks and are actually more interested in reinvesting the dividends. Even then, dividend frequency plays a big role. The purpose of reinvesting is to take advantage of compounding.
In other words, they build a larger position that yields a larger dividend reinvested again in making the position even larger. This cycle can grow your returns exponentially, and that growth is as fast as the dividends are reinvested.
3. Using Value Investing Strategies
Value investing is a school of investment based on the assumption that the stock market participants do not value a company correctly. Value investors believe they can make a healthy long-term profit by identifying profitable companies that the stock market undervalues.
Value Invest Like Warren Buffett
Warren Buffett & Charlie Munger have proven over the last 50 years to be the most successful investors of all time. With an average compound rate of return of 23.3% per year, Buffett and his good friend Charlie Munger have a reputation that Wall Street can only dream of. His wise investing has grown his company Berkshire Hathaway (BRK.A) into a behemoth worth over $500 billion.
This usually means stocks with:
- Good long-term profitability
- Low Debt to Equity
- Strong Market Leadership & Dominance
- Strong Cash Flow & Revenue Growth
- A Track Record of Paying Dividends
- High Margin of Safety
- Low to Medium Price to Earning Ratio
Great Articles Related to Value investing Strategies
- 4 Steps to Build The Best Munger/Buffett Stock Screener
- Value Investing, Strategy & Screening Guide + eBook/pdf
- Value Stocks vs. Growth Stocks Investing Which is Best?
4. Implement a Growth Stock Strategy
When you think about the buying and holding strategy, the immediate thought is which stocks you should 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.
Try the Liberated Stock Trader Beat the Market System
This strategy requires that you buy and hold up to 30 stocks for one year before refreshing the portfolio.
The Liberated Stock Trader (LST) Beat the Market Screener seeks to select stocks that have a significant chance of beating the S&P500 returns. The screener uses growth in free cash flow and explosive EPS growth. Combining this with Joel Greenblatt’s ROC and Earnings Yield formulas, “the Magic Formula,” we have a selection of stocks that beat the market 7 of the last 8 years.
Use the Famous CANSLIM Growth Strategy
CANSLIM is touted to be a highly profitable stock market strategy. CANSLIM is a stock investing growth strategy designed by William J. O’Neil to produce market-beating profit performance. Using the CAN SLIM strategy means you are investing in companies with high earnings growth, new products, and low institutional investment and buying only in bull markets.
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
5. Getting Qualified 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.
Qualified Dividends are typically either Regular Cash Dividends or Extra Dividends that “Qualify” for different Tax Treatment in the U.S.A. As an investor, you are subject to taxation on your profits by either Income Tax or the lower Long-Term Capital Gains Tax.
6. Utilizing Dividend Reinvestment Plans (DRIPS)
Dividend Reinvestment Plans are a Great Way for Long-Term Investors to Build Wealth: Delay Taxes, Commission Free Purchase, Preferential Pricing.
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.
7. Take Advantage of 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.
8. 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. Buying and holding reduce investing overhead significantly.
9. 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.
10. Buy & Hold is Low Effort
Implementing any of the three buy and hold strategies is made a lot easier with the new generation of stock screening and research tools available. You can save thousands of hours when you use the right software to perform your research, financial analysis, and portfolio management.
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Related Articles: Finding Great Stocks With Stock Rover
- 12 Legendary Strategies to Beat the Market That [Really] Work
- Our Beat the Market Screener [Actually] Beats the Market
- 4 Easy Steps to Build The Best Buffett Stock Screener
- 6 Steps to Build an Ethical ESG Investment Portfolio
- All Value Investing Strategies & Articles
- Use a CANSLIM Stock Screener Strategy To Beat the Market
Summary: Buy and Hold Strategy
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.”
If you have a problem holding stocks for a long time, check out our article on Fear of Missing Out (FOMO).
In short, the Best Time to be a Buy and Hold Investor is Always – And Yes, It Is Still Cool.
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?
- Published: Tue, 07 Jul 2019 13:00:00 GMT
- Duration 00:11:46
- More Podcast from Liberated Stock Trader
Video: Stock Charts for the Long-Term Buy and Hold Investor