Question of the Week

Tiffany's brother, Jamal, is a new investor but believes that the markets are basically efficient and that he doesn't have the knack for or interest in predicting trends. He also believes in saving money on transaction costs and taxes. Jamal's investment style is best described by which of the following:

A) Tactical asset allocation
B) Diversification
C) Buy and hold
D)

Answer:

The correct answer is C).

A buy-and-hold strategy describes a passive investment approach. This approach assumes that markets are efficient and that it is impossible to time the purchase or sale of securities or to manage the balance of assets in order to take advantage of market movements. Since this is a passive strategy, there are reduced transactions costs and also reduced tax consequences. The downside to a buy-and-hold approach is that over time, the risk and reward of the asset allocation will change and may not be in alignment with the client's original risk tolerance and objectives.