What Is a Buy-and-Hold?

What Is a Buy-and-Hold?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Buy-and-hold is an investment strategy where an investor purchases stocks or other types of securities and keeps them for a long period irrespective of market fluctuations. The idea behind this strategy is rooted in the belief that over time, the stock market will provide a good rate of return despite periods of volatility or decline. This belief is supported by historical market trends showing steady market growth over the long term.

Related Questions

1. What are the benefits of a buy-and-hold strategy?

The benefits include lower transaction costs as frequent buying and selling can rack up fees, reduced risk of making poor timing choices, and potential for long-term growth. Also, it allows for compounding, where dividends or interest earned are reinvested to create a base for future earnings.

2. Does a buy-and-hold strategy always work?

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No strategy is fool-proof and the buy-and-hold is no exception. Market crashes can take a long period to recover from, and some companies can fail, reducing stocks to zero value. Therefore, a balanced portfolio and periodic assessment are critical even with this strategy.

3. What’s a common alternative to buy-and-hold?

Day trading is often considered an alternative. This strategy involves making short-term trades to capitalize on daily stock market fluctuations. But it requires a greater investment of time and often comes with higher risk.

4. Is buy-and-hold suitable for all types of securities?

While commonly associated with stocks, the buy-and-hold strategy can be used for other securities like bonds and index funds. However, the strategy may be less effective for commodities and currencies due to their inherent volatility.

5. How does one decide to sell in a buy-and-hold strategy?

While the intent is to hold long-term, there may be situations that mandate selling. These include significant changes in the company’s fundamentals, a need for cash, or rebalancing the portfolio. It’s important for investors to review their portfolio periodically to make these decisions.