When you invest in the stock market — whether with retirement funds or taxable investment accounts — you will hear many new terms. One of the most important is the buy and hold strategy. What does buy and hold mean? Should you follow it? And what challenges does it present? Discover what every amateur investor needs to know.
What Is Buy and Hold?
Buy and hold refers to an investing approach that emphasizes patience and time in order to make money on any investment. The investor buys the investment — usually applied to stocks, which are easily bought and sold — and then waits for its value to organically rise over a long period of time.
This is in contrast to the strategy of trading, or buying stocks for the short term and selling them for a profit as soon as their price rises to a certain point. Trading does not look at the long-term potential for the stock but rather at its expected performance over as little as a few days, weeks, or months.
Why Is Buy and Hold Beneficial?
Why should you use the buy and hold strategy? There are many reasons, both financial and personal.
On a financial level, having a longer outlook and holding onto stocks allows you to benefit from the natural rise in the value of the overall market. As of the end of 2021, the average annual return in a key index — the S&P 500 — is 10.49%. Some years, of course, will have lower returns while other years have higher ones. By waiting out these ups and downs, you get a more reliable overall profit.
Buy and hold is a good plan for many average American investors for nonfinancial reasons. It is simple, allowing anyone to invest their retirement or extra savings into the market without having to be an expert in stocks. It reduces stress because you are not focused on the day-to-day changes that constantly occur. And it promotes patience rather than panic when the economy cyclically contracts and values drop.
Most average investors also find that they are not as successful at trading as they want to be or expected to be. It is complicated and requires deeper knowledge of market nuances. And it calls for just the right timing, which is challenging to find. So for those who are not keenly involved in the investing world, buy and hold is more successful even if it is less exciting.
What Challenges Exist with Buy and Hold?
Of course, the buy and hold approach is not without its challenges. The biggest difficulty for most people is developing the patience and long-term outlook that lets them ride out the waves and valleys in the stock market. When your 401(k) loses value, you can easily react emotionally and want to sell before it gets any worse. You need self-control, calm, and professional guidance to continue to hold onto stocks.
You must also have a longer time frame to make financial gain than you would with a trading strategy. Trading relies on quick profit, while buy and hold lets time do the work for you. You need to start earlier, have longer goals, and let that money compound.
Where Can You Learn More?
Is buy and hold right for you? How can you better protect yourself from its challenges and take advantage of its strengths? Start by learning more about investing strategies, their goals, and their methods. Presidio Wealth Management can help. We have assisted many clients in finding the best way to invest their portfolio and to meet their financial goals. Call today to make an appointment and see how we can help you.