The oldest strategy known to man, the buy and hold strategy!
We have already seen that the U.S. markets have made an average return of between 5% and 6.5% per year since inception. So the theory of buy and hold is that is you own a stock long enough eventually you will come out with a profit.
Advantages of the Buy & Hold System
- If you select the right stocks this strategy can pay off over time.
- Works best if you buy an Exchange Traded Fund (ETF) that tracks the market
- Lower trading costs as you buy and sell infrequently
The problem is selecting the right stocks. All stocks reach new highs, but also fall out of favor with the market and can spend a long time at multi-year lows.
If you buy the stock at the wrong time and hold on to it even though it moves down a lot then you may be in a situation for many years where your capital is in a stock that is not appreciating in value. You will be suffering from lost opportunity and therefore underperform the market.
Average trade duration
Long-term – years
The effort to maintain the strategy
Low – as you very rarely buy or sell a stock it requires little maintenance.
Medium – not necessarily low like most people would think. There are very few stock market opportunities that can be rated as low. Stock selection is key for this strategy.