What is 'Buy And Hold'
Buy and hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.
BREAKING DOWN 'Buy And Hold'Conventional investing wisdom indicates that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, a debate over whether a buy-and-hold strategy is actually superior to an active investing strategy. Both sides have valid arguments; however, a buy-and-hold strategy has tax benefits because long-term investments tend to be taxed at a lower rate than short-term investments.
To purchase shares of common stock is to take ownership of a company. Ownership has its privileges, which include voting rights and a stake in corporate profits as a company grows. Shareholders function as direct decision-makers, with the number of votes equal to the number of shares held. Shareholders vote on critical issues such as mergers and acquisitions and elect directors to the board. Activist investors with substantial holdings wield considerable influence over management, often seeking to gain representation on the board. Recognizing that change takes time, committed shareholders adopt buy-and-hold strategies. Rather than treating ownership as a short-term vehicle for profit in the mode of a day trader, buy-and-hold investors retain shares through bull markets and bear markets. In this way, equity owners bear the ultimate risk of failure or the supreme reward of substantial appreciation.
Active vs. Passive Management
The debate over passive versus active management styles persists. A buy-and-hold investor reflects the strategy of the former. In the case of a mutual fund or exchange-traded fund (ETF), indexed portfolios simply mirror that of a common benchmark. As indices rebalance and weightings increase relative to market capitalization, turnover rates, around 3% among passive funds such as an S&P 500 Index portfolio, remain ultra low as managers stick with issues across the broad market. Stocks are held for as long as they remain components of the indices.
Buy-and-Hold Performance Insight
A Morningstar study revealed that mid-cap value funds were the only category to outpace their respective benchmarks more than 50% of the time in a 10-year period through Dec. 31, 2014. Therefore, performance historically favors a buy-and-hold strategy. Arguments against the long-term strategy state that investors forsake gains by riding out volatility rather than locking in gains, essentially timing the market. Some professionals succeed with short-term trading strategies. Vast successes are also realized by loyalty, commitment to ownership and the simple pursuit of standing pat.