Buy and hold is a passive investment strategy for which an investor buys stocks and holds them for a long period regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks but is not concerned with short-term price movements and technical indicators.
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, debate over whether a buy-and-hold strategy is 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 the 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.
Active vs. Passive Management
The debate over passive versus active management styles persists. A buy-and-hold investor reflects a passive management style. In the case of a mutual fund or exchange-traded fund (ETF), indexed portfolios mirror that of a common benchmark. As indices rebalance and weightings increase relative to market capitalization, turnover rates, which hover around 3% among passive funds such as an S&P 500 Index portfolio, remain ultra low as managers focus on issues across the broad market. Stocks are held for as long as they remain components of the indices.
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. Therefore, equity owners bear the ultimate risk of failure or the supreme reward of substantial appreciation.
An example of a buy-and-hold strategy that would have worked is the purchase of Apple stock. In January 2008, if an investor had bought 100 shares at its closing price of $18 per share and held onto the stock until July 2016, the stock was then worth $104 per share. That’s a return of over 500% in just eight years.
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. Investment success is also realized by loyalty, commitment to ownership and the simple pursuit of standing pat or not moving from a chosen position.