Buy and hold refers to an investing strategy practiced favorably by passive investors. An investor using a buy-and-hold strategy actively selects stocks, but once they hold a position, they usually ignore the day-to-day and potentially even month-to-month fluctuations in the stock's price and technical indicators.
The idea is that the investor lets his or her money increase with the growth of the overall market, only occasionally making changes in their portfolio, such as to readjust the asset class balance. Past performance has shown that a buy-and-hold strategy has historically been successful for achieving consistent portfolio growth.
- With a 'buy and hold' strategy, an investor chooses to invest in a certain stock, mutual fund, ETF or other security and tends to hang in despite short-term fluctuations.
- This represents passive investing and is different from active investing, in which an investor makes changes to a portfolio, including buying and selling securities, in response to company-specific or broad market news.
- Buy and hold is a long-term strategy suited to somewhat cautious investors who want to research their investments, select a few options and then stay put for a while.
Buy and Hold vs. Active Investing
In contrast to a buy-and-hold strategy, active investing attempts to profit from shorter-term price movements that typically last less than a year. Keep in mind, however, that even though long-term holding is typically considered to be a period of more than five years, the meaning of "short term" and "long term" is not absolute or fixed. Active investors sell stock mostly according to what's currently happening in the stock market.
It's also important to remember that a buy-and-hold strategy works best when you've done all the proper research to ensure that you buy a high-quality company. It's a gamble to buy stock randomly without doing the proper research.
As an example of active vs. passive investing, mutual funds represent a form of active investing as they are run by a manager or team of managers. Exchange-traded funds, or ETFs, represent a passive form of investing as they typically follow an established stock index that is only rarely rebalanced.
Advantages and Disadvantages
Active, or short-term investors, would argue that long-term investors miss out on gains by riding out volatility rather than locking in returns by trying to time the market. Short-term trading strategies have been successful for some professionals and investors. These kinds of strategies involve a deeper level of analysis and the expertise to know when to get into or out of a particular investment, followed by taking action.
But a buy-and-hold strategy can be more effective for cautious investors or for those who would prefer to minimize the number of trades they need to manage. There are also tax advantages to buying and holding, rather than selling quickly.
(To learn more about buy-and-hold practices, check out How Portfolio Laziness Pays Off.)