Is buy and hold still a good strategy? That is one of the most frequently asked questions in many investing forums. It is an essential question today because the financial markets are changing year after year. A strategy that was fine years ago may no more be suitable in current market environment where investing algorithms react to news around the world at the highest speed.
In this article, I will explain to market players why one should or not deploy a buy and hold investing strategy. At the end of it, one will know if buy and hold investing strategy is still good for one or not. Without anymore delays, let's get started.
Is Buy And Hold Dead?
It is not dead one bit. It is still alive and kicking. One can buy and hold an undervalued stock or any good quality financial instrument and hold on to it for one or two years or more for both capital gains and dividends.
The tricky part is to buy the good quality stock at the right price and time to earn dividends while accumulating capital gains as the stock is rising.
Today's financial markets are not easier than they were years ago. It is more challenging to buy and hold in these fast pace markets where investors are competing with more advanced trading and investing tools. In the past it was men against men, but today it is about men versus trading computers and algorithms.
One of the advantages of buy and hold is the time one has given oneself for a good investment to mature instead of being drag down very fast due some short term or medium unfortunate news.
After those short term price fluctuations, the trend can resume if the company continues to create more added value.
Indeed, one does not have to worry about stop losses that could be triggered and caused one to take premature losses. The most important thing in this case is to sow the good see in a viable market environment in due course and let the time work in one's favour.
Buy and hold can never be dead because in the long term, the markets rise more often than they decline. A bullish trend takes longer time than its correction.
If one checks SP 500 stock index on the monthly chart, one will notice that it rose from the year 1980 to 2000 (20 years) and declined from 2000 to 2009 (nine years).
Another reason why it is still good to buy and hold is because only few market players know how to sell and hold. In fact it is only a tiny group of market players that really knows how to sell and hold. So most people just want to buy and hold.
Please, understand that I am not saying that it is easy to successfully buy and hold. Yes it is simple, but to get paid at the end of the day, it is a different thing.
Another reason why buy and hold is still good is because there are always employees buy and save options.
Indeed, many companies now offer their hundreds or thousands of employees the chance to own shares. So every month an employee can buy a specific number of shares. That is done automatically through options providers.
The employee does not have to lift a finger or do anything. It is all done through the payroll department. Most of the times, those scheme last three years. There is also a tax benefit attached to it. Those employees options are excellent scheme for them to buy and hold and have a stake in the company. As you can see those are buyers that will propel the share price.
Apart from those activities, there are mutual funds, pension funds that are always buying and holding. As always a market with an increasing number of buyers will surely cause the market to rise.
So all in all, buy and hold is still good today.
When Does Buy And Hold Become Tricky?
Please do not just buy and hold any stock anytime. It is important that one learns how to buy and hold.
Buy and hold can reserve nasty surprises when it all starts well and suddenly the economy or company gets into a mess. For those who are holding on for too long, note that due to the activities of trading algorithms, one can be forced to take losses or hold on to a stock that the algorithms have marked undesirable.
The markets can quickly change when one is thinking to grab a tidy profit. With that, one can be stuck to a degrading financial instrument for an unnecessary length of time.
Buy and hold can also become tricky to those who do not know how to cut losses. Take it from me, every investor at one point will have to cut losses instead of keeping useless stocks.
Buy and hold also requires that one knows how to boost a losing position instead of being caught up in a value trap.
For example, one buys a stock X at $20. After few weeks, the stock declines to $8.
One can wait until one day, may be it rises above $20 or one can buy more if one knows how and when to buy the dips. The value trap occurs when one is doubling down on a useless financial instrument that keep going down (bottomless pit).
The opportunity to buy the markets' dips in a timely fashion can help one boost and recover a losing position before it is too late. It takes a bit of time to get used to that exercise. Do not worry, but keep improving it.
Buy and hold is also tricky when one buy the financial instrument at the top of the bullish trend. It is a market timing mistake.
In that instance one must not start buying the dips. It is crazy, but it is happening all the times because the traditional investors deny themselves the right to learn the Elliott wave principle. I feel sorry for them.
Usually, those who buy at the top of a bullish trend just as the correction is about to start tend to double down during the correction instead of waiting for it to end. A better approach would be to wait until a new trend starts before one buys again. That mistake can cause one to carry a losing position for years.
In the worst case scenario, some investors do sell their stocks at loss just as a new trend is about to start because they can not wait anymore. So people are buying high at the top of the trend, and selling when it is finally oversold.
One can avoid that investment error by checking my seven investment tips. Really, one must buy low and sell high or buy the dips on the edge as the trend is not yet finished.
The challenge is huge even more when one does not know how to manage gains. In that case, one can see a profitable position becomes a loser.
For example, one bought a stock X at $12 and a year later is at $24. That is a 100% gain. Imagine after one month the stock started to decline. Firstly, it dropped to $15, then $12 and $4. Now, a profitable position is turning red. Sometimes, one can get away with that mistake, but in many instances, one will not if a correction just starts at the end of a bullish trend.
In many occurrences, one can end up holding on to that stock for more than eight years.
How Trading Algorithms Do Affect Buy And Hold?
One of the challenges of buy and hold is the speed of the trading algorithms. They are quick to spot buying opportunities and take them. With their speed, they can cause the price to rise too quickly before one gets in. Consequently, one may end up buying it at a higher price.
Sometimes, one will end up taking a lesser profit. Image one bought a stock at $10 and it rose to $30. That is really cool. So as one is thinking of how one will spend that profit, the price quickly sink to $18. The algorithms have been faster in that case as they reacted to a major economic news.
To be fair, there are times also when the algorithms do boost profit or cause the price to reach a specific price level where one is willing to buy or sell a stock.
They also provide enough liquidity that helps to avoid volatile price moves that one often faces when dealing with illiquid financial instruments.
Buy And Hold Creates Millionaires
Though one can face many challenges when one buys and holds a stock, one can also turn a modest amount of money into millions of Dollars if one is using the dividends reinvestment plan over at least twenty years.
Both the cumulative capital gain and the dividends reinvestment can seriously boost one's investment over twenty-five years period especially if one has bought the stock at the early stage at a reasonable price. The power of the dividends reinvestment plan can not be underestimated.
Buy and hold is still good. It is even better because day and swing traders do not have enough time like the long term investors to hold onto their positions therefore are easily shaken out of their positions.
Though it is more challenging these days to buy and hold, it is still the safest way to profit in the financial markets. The real issue about the buy and holdinvestment strategy is not whether it is still good or not, but whether one has what it takes to buy and hold like a sophisticated investor.
Consequently, many do fail to buy and hold successfully because they have never learnt to buy and holdlike the professionals.
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