Trading Strategy 5 – Buy and Hold
Publish on 2022-01-07
Buy and Hold, also known as Buy and Forget, is a long-term and passive investing strategy where investors buy an asset and hold it for a long time period that usually lasts for 3-5 years, or even decades.
Theoretical Basis of Buy and Hold
Buy-and-hold traders ignore the short-term price fluctuations of the market in favor of the long-term performance of asset prices. According to the Efficient Market Hypothesis (EMH), most of investors who adopt the buy-and-hold strategy do not expect “long-term market outperformance”. They believe that all known information about the market is actually reflected in current asset prices, so any analysis or strategy is unlikely to lead to returns that outperform the market in the long run. Most investors who believe in the theory also prefer the buy-and-hold strategy. They advocate that time can help maximize profits and enterprise value, and that long-term holding can reduce investment risks to a certain extent.
Features of Buy-and-Hold
1. A long-term, passive investment strategy
2. A long holding period that lasts several years or decades
3. Ignore short-term fluctuations in favor of long-term price performance
4. Prefer fundamental analysis rather than technical analysis
Pros of Buy-and-Hold
1. Easy operation. Investors pay attention to the long-term investment value of assets and the overall trend of the market, in other words they focus on the future potential of assets. Therefore, investors do not care much about the so-called market timing, they do not worry about finding the perfect time to enter or exit, and they do not spend a lot of time watching the market. Once they identify an asset for investment, they will buy and hold it for a long time.
2. Low trading costs. Compared with other trading strategies, the buy-and-hold strategy has the longest holding time and the lowest trading frequency, which effectively reduces trading costs while increasing the net profits. In addition, a long holding period can also enable investors to enjoy tax breaks for capital gains (It usually takes several years for some growth companies to accumulate capital gains, so countries that levy capital gains tax generally adopt a low tax rate.)
3. Lower “management risk”. Passive investment strategies can reduce the so-called "management risk", that is, the risk of actively managing investment assets or portfolios. Buy-and-hold traders pay no attention to the short-term price fluctuations in the market, and hold their assets for a long time after buying, making few investment decisions, which contributes to lowering the risk of managing investments.
Cons of Buy-and-Hold
1. Low capital utilization. The buy-and-hold strategy carries huge opportunity costs. Investors who adopt this strategy will be tied up with their assets for a long time, ignoring other investment opportunities during the holding period. However, price volatility does not always bring harm to investors. If they seize the opportunity, they will have a good chance to make a large profit, while the buy-and-hold strategy basically deprives them of the possibility of profiting from price fluctuations. Therefore, buy-and-hold would lead to low utilization of capital.
2. Risk of losses. Buy-and-hold traders could possibly face huge losses if they choose a a bad time to enter the market (buy at a high price). For investors, it’s still a huge challenge to judge the intrinsic value of the asset. They could also encounter a situation that the price of the assets they invested keeps falling and is hard to make a turnaround in a few years.
3. Lack of flexibility. Buy-and-hold investors generally will not be concerned about the short-term price movements in the market once they buy and hold assets. If a bear market occurs, they have no choice but watch their investments shrink in value. By contrast, traders who adopt flexible trading strategies can also profit from a bear market.