Buy and hold

From Infogalactic: the planetary knowledge core
Jump to: navigation, search

Buy and hold is an investment strategy where an investor buys stocks and holds them for a long time.[1]

This is based on the view that in the long run financial markets give a good rate of return even while taking into account a degree of volatility. It says that investors will never see such returns if they bail out after a decline. This viewpoint holds that market timing, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work; attempting such timing gives negative results, at least for small or unsophisticated investors, so it is better for them to simply buy and hold.

The antithesis of buy-and-hold is the concept of day trading, in which money can be made in the short term if an individual tries to short on the peaks, and buy on the lows with greater money coming with greater volatility.

One argument for the strategy is the efficient-market hypothesis (EMH): If every security is fairly valued at all times, then there is really no point to trade. Some take the buy-and-hold strategy to an extreme, advocating that you should never sell a security unless you need the money.[2]

Others have advocated buy-and-hold on purely cost-based grounds, without resort to the EMH. Costs such as brokerage and bid/offer spread are incurred on all transactions, and buy-and-hold involves the fewest transactions for a given amount invested in the market, all other things being equal. Taxation law also has some effect; tax for long-term capital gains may be lower, and tax may be due only when the asset is sold (or never if the person dies). Warren Buffett is an example of a buy-and-hold advocate who has rejected the EMH in his writings, and has built his fortune by investing in companies at times when they were undervalued.

The strategy was less popular in early 2009.[3]

Real estate investment

A buy and hold strategy can also apply to real estate. According to this concept, a person will buy a property, such as a house, and not sell it. This is typically done with borrowed money, although part of the plan is that the loan will eventually be paid off, and it is then not a leveraged investment. It contrasts with a trading strategy.

See also


External links