Many investors are faced with the question: is buy and hold investing the best strategy for me?
Even though buy and hold investing is by far the most popular investing strategy, sometimes investors wonder if it truly is the best strategy for them.
This question often arises after experiencing unusually high volatility, portfolio losses, or extended periods of unimpressive returns.
Let me clarify first that a buy and hold investing strategy buys and sells assets with the intention to hold them long term vs buying and selling investments based on factors such as:
- Changes in economic conditions
- Changes in asset valuations
- Changes in investment risk exposure
- Potential opportunities that present themselves
In this post I’ll share:
- 5 factors to help you decide if buy and hold investing is the best strategy
- 5 epiphanies I’ve had while using both buy and hold investing strategies and active investing strategies over the decades
- My conclusion as to whether buy and hold investing is the best strategy for my own portfolios
Note that this post is geared toward buy and hold investing in stocks, bonds and/or other defensive investments (such as commodity funds) vs buying and holding alternative assets like physical real estate or small business since most of my readers own at least some stocks and bonds as long term investments.
1. The Investor’s Goals and Time Frame
The time frame in which you need to use your investment capital may be the biggest factor in choosing a buy and hold strategy vs an active investment strategy.
For example, if you need access to your money in three years and you’re a stock investor, buy and hold may not be the best investing method for you.
Because history clearly reveals that stocks have had negative returns for time frames much longer than three years, as you can see from the chart below. This is problematic if you need access to your money during an extended downturn in stock prices.
On the other hand, if you’re not planning to access your investment capital for a very long time frame, a buy and hold investing strategy might make more sense than active investing.
There isn’t, however, a rigid rule that applies to all investors and investing time frames as explained more ahead.
I like to add three more factors for consideration in conjunction with time frame when deciding if buy and hold investing is the best strategy for an asset I want to own, market cycles, economic conditions, and valuations.
That’s because these factors heavily influence the price a buy and hold investor will pay when initially entering positions.
And cost is one half of the capital gain or loss equation.
A buy and hold investing strategy can certainly be more tax efficient than an active investment strategy that buys and sells securities.
In fact, this is one of the main disadvantages of a more active investing approach vs a buy and hold investing strategy.
Many investment accounts, however, are tax efficient retirement accounts so taxes can be less of an issue if not a non-issue for many investors.
3. Ease of Buy and Hold Investing
Buy and hold investing is about as simple as it gets.
Investors simply buy the assets they choose, usually based on their own factors for asset allocation, and hold them long term. Another option is to follow a buy and hold investing strategy developed by a financial professional, such as The All Weather Portfolio, regardless of age.
Many investors rebalance buy and hold portfolios annually or more often, however, depending on the type of asset allocation method they are using.
4. Level of Investor Wealth
Investors who feel certain they have plenty of wealth to cover their financial needs may choose the ease and friendly tax benefits of buy and hold investing over a more active investing strategy.
5. Knowledge Required for Buy and Hold Investing
It undoubtedly takes more knowledge to invest using an active investing method vs a buy and hold investing method.
Therefore, if you want the simplest investing strategy, buy and hold investing may be right for you.
Buy and hold investing simply requires selecting the assets owned, and buying and holding the investments long term. To make matters even simpler, a buy and hold investing strategy is commonly done with mutual funds or ETFs (Exchange Traded Funds).
On the other hand, active investing requires choosing a more advanced investing method from among the many options, learning how to implement it, and then doing the actual implementation.
Many investors simply don’t have a desire to learn about investing period, let alone learn and implement a more active investing method, such as tactical investing.
There are many alternatives to buy and hold investing, however, some more complex than others.
Fortunately there is technology as well as services now that make it easier to research and implement a more active investing approach for anyone seeking more than a simple buy and hold investing strategy.
One such service I like is Allocate Smartly where investors can research back tested systems and use their implementation tools to make the learning and implementation curve easier for investors who decide buy and hold investing isn’t the best strategy for them.
Now you’re seen five factors to consider in deciding if a buy and hold investing strategy is best for you.
5 Insights about Buying and Holding Investments
Here are some other important insights about buy and hold investing strategies that I’ve learned over the years.
Buy and Hold Investing Vs Active Investing
When addressing whether buy and hold investing is the best strategy, the huge financial services industry often refers to studies that show active fund managers consistently underperform buy and hold fund managers, or “passive fund managers”.
Note that passive managers typically own index funds as opposed to individual securities, in addition to buying and holding assets for long periods. Buy and hold investing doesn’t have to be done with index funds, but it usually is now.
Since index investing simply buys and holds the securities in an index without buying or selling unless a rare change occurs in the index holdings, the trend toward buy and hold investing is amplified even more with approximately $11 trillion in index funds that are simply all buying and holding the same securities.
Does Buy and Hold Investing Beat Active Investing?
It’s worth pointing out that, as a general rule, during easy investing periods with bull markets (which are often fueled by accommodative Federal Reserve actions such as declining interest rates), buy and hold investing strategies perform well.
During more challenging investing periods, however, more active investing has an edge because it can and does sell out of declining asset classes and invest in defensive assets with better potential for price increases.
That’s why buy and hold investing is referred to as strategic vs tactical investing. Tactical investors buy and sell assets based on changing conditions.
They key, of course, is buying and selling investments at the right time to result in capital gains. Reportedly, individual investors are wrong most of the time when it comes to accomplishing this, thereby further supporting the trend toward buy and hold investing strategies.
Income Investors May Prefer a Buy and Hold Strategy
Investors with a primary goal of income from sources such as dividends vs capital gains may decide buy and hold investing is the best strategy for them.
This is because investment income, the primary objective, continues to flow in as long as the income generating assets are held.
FOMO Fuels Buying and Holding Investments
Many investors feel that they absolutely must be buy and hold investors so they remain invested in stocks at all times. This can be due to FOMO, or fear of missing out.
FOMO is often a result of studies published by the financial services industry showing investors will suffer if they miss the 20 best days of the market or similar.
The message is that buy and hold investing results in being invested during those “power days” for the stock market which result in stellar stock market returns.
While such studies are certainly worthy of consideration, the time frame during which such studies are done determine the study results.
The time frame you’re is investing is definitely going to be different from the time frame during which the study was done.
This fact is often overlooked but will want to be considered when deciding if a buy and hold investing strategy is best for you.
Cookie Cutter Investing
We all like simple answers, even to super important questions like “Is buy and hold investing the best strategy?”
The truth is there is no cookie cutter investing strategy that is best for everyone at all times and every level of wealth.
Whether a buy and hold investing strategy is best for any investor depends on several factors related to both the individual investor as well outside factors beyond an investor’s control, such as the economy and financial markets.
Do I Prefer a Buy and Hold Investing Strategy?
I concluded a buy and hold investing strategy was not the best strategy for all of our stock and bond portfolio since:
- We already use a buy and hold method with our alternative investments and our home
- I dislike having all our investment capital tied up during extended bear markets
- I like to buy undervalued assets
- I like to invest in assets with forward looking potential
The majority of investors, however, still prefer a buy and hold investing strategy.
Big Picture: Is Buy and Hold Investing the Best Strategy?
As you can see, there are both pros and cons of buy and hold investing.
It’s important for every investor to find what works best based on their own situation, skills, and acceptable risk, and then invest accordingly.
I hope sharing my own experiences and insights using both buy and hold investing strategies and active investing is helpful for you in deciding if buy and hold investing is the best strategy for you.
People Also Ask:
Can Dollar Cost Averaging Mitigate Buy and Hold Risk?
The effect these three factors have on returns is one reason dollar cost averaging is so popular with buy and hold investors; investments are being bought during different economic conditions and at various asset valuation levels when dollar cost averaging is done.
But not all investors dollar cost average. Many investors get a large bonus, inheritance or other windfall and eagerly invest it all at one time as soon as it’s received rather than dollar cost averaging.
This can be risky, however, even when the investor is planning a conservative buy and hold strategy between high quality stocks and Treasury bonds.
For example, if stocks are extremely overvalued when they are bought for the long term, stocks as a whole may be ready to fall and revert back below the mean soon after being bought.
This isn’t only the case with stocks, as bond prices rise and fall in cycles, too.
For example, there are times when bond interest is near long term lows resulting in negative real bond yields along with price declines in bond values.
Investors often think market cycles, economic conditions, and valuations aren’t relevant if they plan to use a buy and hold investing strategy.
But entering into a buy and hold investing strategy shortly ahead of a steep decline can be detrimental to investment returns, net worth, and investor confidence.
Is Market Timing the Alternative to Buy and Hold Investing?
Investing strategies that aren’t buy and hold aren’t necessarily about trying to “time markets”.
Instead they are often about evaluating investments at any given time rather than following a rigid buy and hold investing strategy that disregards valuations and other factors which drive returns.
Because at the end of the day, we invest to get the returns we need to reach our financial goals.
And all these outside factors (market cycles, economic conditions and valuations) affect our investment returns.
And since buy and hold investing ignores these three factors, it leads me to question if buy and hold investing is always the best strategy.
You may also enjoy my video Is Buy and Hold Investing the Best Strategy?
Macrotrends – Long term chart of S&P 500
The Atlantic – Index fund industry size
Allocate Smartly – Member data used by permission (Note: Affiliate Link)
Wallethacks.com – Home equity percent of net worth chart
Motley Fool – Percent of wealthy investors in alternative investments