Buy and Hold Strategy - What Is It, Examples, Advantages (2024)

The buy-and-hold strategy is one of the most popular investment approaches. It is based on the idea of holding assets over the long term with the aim of generating returns from the rise in their prices, and dividend payouts, if any. Today we will look at its basic principles, benefits, and risks, and explain how prominent investors have used it.

Historical performance of the buy-and-hold strategy

The buy-and-hold strategy is one of the most popular and widely used investment strategies. Let’s look at its historical performance with the Vanguard 500 Index Investor as an example. According to Portfolio Visualizer, the average annual total return of the index from January 1994 to April 2023 inclusive was 12.93%. The highest annual return during this period reached 32.18%, and the minimum annual return was 18.23%.

Buy-and-hold strategy principles

  • Hold assets in a portfolio for an extended period of time, starting from five years
  • Select financial instruments with long-term growth potential and strong fundamental indicators
  • Spread investments across different asset classes and sectors to reduce risks and increase potential returns
  • Totally ignore short-term market fluctuations
  • Regularly rebalance the portfolio by buying and selling assets, while considering investment goals and significant changes in market conditions

Buy-and-hold strategy advantages

  • No need for frequent active trading operations
  • Reduced transaction costs
  • No need for constant monitoring of the market and quick decision making
  • Reduced stress levels
  • Increased total profit, subject to regularly reinvested dividends

Buy-and-hold strategy possible risks

  • Loss of long-term profit due to the premature sale of assets in case the investment goals change
  • Difficulty in finding and selecting financial instruments with strong fundamental indicators and long-term growth potential
  • Mistakenly choosing the wrong company for long-term investing
  • Investor is not prepared for declines in the value of short-term and long-term investments and is unable to hold open positions for a long period of time

Warren Buffett and the buy-and-hold strategy

Warren Buffett is one of the most successful and respected investors in the history of the financial world. He holds the position of CEO and Chairman of the Board of Directors of Berkshire Hathaway (NYSE:BRKb).

Buffet demonstrated through his approach to investing that the buy-and-hold strategy can be effective if companies are selected based on fundamental analysis and with a long-term view.

See also Silver Market Outlook 2024: Comprehensive Analysis and Future Price Predictions

Investment rules from the Oracle of Omaha:

  1. Invest for the long term.
  2. Do not track every price fluctuation.
  3. Invest in what you understand.
  4. Be guided by the value of the company.
  5. Buy stocks at a reduced price.
  6. Learn to invest.
  7. Pay attention to dividends.

An example of Buffett’s investing with the buy-and-hold strategy

Berkshire Hathaway bought Coca-Cola Company (NYSE: KO) stock for the first time in early 1988: it purchased about 200 million shares. At that time, they traded at about 2.5 USD per unit.

The Coca-Cola Company was already a leader in its industry at that time. In 1989, Berkshire Hathaway acquired shares in this company for another 600 million USD. During that year, the stock rose from 2.72 to 4.83 USD per unit.

As at 31 March 2023, Warren Buffett’s company owns 400 million shares of Coca-Cola Company, accounting for 9.2% of the portfolio. From January 1988 to March 2023 inclusive, the stock price increased from 2.5 to 62.03 USD.

Buffett has pursued a buy-and-hold strategy regardless of short-term market fluctuations and changes in the value of Coca-Cola Company shares. For example, while these shares lost 54% in price from July 1998 to February 2003 inclusive, the investor continued to hold them in his portfolio.

Summary

The buy-and-hold strategy is an approach to investing based on the assumption of the long-term appreciation of the selected assets and the growth of markets in general. This approach may be of interest to investors who focus on long-term investments and want to avoid frequent trading.

This tactic will require patience, discipline, experience, and time for asset analysis and selection. However, like any other strategy, Buy-and-Hold has its downsides, so it is worth carefully analysing your investment goals and risk appetite before applying it.

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* – Past performance is not a reliable indicator of future results or future performance.

The material presented and the information contained herein is for information purposes only and in no way should be considered as the provision of investment advice for the purposes of Investment Firms Law 87(I)/2017 of the Republic of Cyprus or any other form of personal advice or recommendation, which relates to certain types of transactions with certain types of financial instruments.


Buy and Hold Strategy - What Is It, Examples, Advantages (2024)

FAQs

Buy and Hold Strategy - What Is It, Examples, Advantages? ›

The Buy and Hold strategy is preferred for its potential to yield significant long-term returns, lower transaction costs due to fewer trades, reduced tax liabilities on long-term capital gains, and the benefit of compound interest. It's also less time-consuming and requires less market expertise than active trading.

Which of the following are advantages of the buy-and-hold strategy? ›

Buy and hold is a long-term passive strategy where investors keep a relatively stable portfolio over time, regardless of short-term fluctuations. Buy and hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes.

What are the benefits of the buy strategy? ›

  • Why mid-sized businesses should explore a buy and build strategy. ...
  • Capture new customers in a crowded market. ...
  • Enter new markets or expand internationally. ...
  • Diversify and expand your product range or services. ...
  • Add new skills and capabilities. ...
  • Achieve economies of scale. ...
  • Attain higher multiples. ...
  • Meet objectives at speed.

What are the disadvantages of buy-and-hold strategy? ›

The biggest drawback of this strategy is the large opportunity cost attached to it. To buy and hold something means you are tied up in that asset for the long haul. Thus, a buy and holder must have the self-discipline to not chase after other investment opportunities during this holding period.

What is an example of a buy-and-hold strategy? ›

Buffett has pursued a buy-and-hold strategy regardless of short-term market fluctuations and changes in the value of Coca-Cola Company shares. For example, while these shares lost 54% in price from July 1998 to February 2003 inclusive, the investor continued to hold them in his portfolio.

Which of the following are advantages of the buy-and-hold strategy quizlet? ›

Which of the following are advantages of the buy and hold strategy? Low transaction costs, capital gains taxed at the long- term rate, portfolio requires less time and energy to manage than for most other strategies.

What is the purpose of the buy-and-hold strategy? ›

Buy-and-hold is a passive, long-term investment strategy that creates a stable portfolio over a long period of time to generate higher returns. Instead of trading shares based on stock market timing, investors buy stocks and hold onto them despite any market fluctuation.

What is strategy advantage? ›

if a company or country has a strategic advantage, it has a particular characteristic or way of doing things that makes it more successful than others: create/gain a strategic advantage Gazprom has gained a strategic advantage by securing export routes and carving up markets.

What are the advantages and disadvantages of buyout? ›

The Advantages and Disadvantages of a Company Buyout
  • ADVANTAGE: Gaining New Products Or Technology. ...
  • DISADVANTAGE: Increased Debt. ...
  • ADVANTAGE: Reduced Competition. ...
  • DISADVANTAGE: Loss of Key Personnel. ...
  • ADVANTAGE: Increased Efficiency. ...
  • DISADVANTAGE: Integration.
Feb 9, 2015

What is importance and benefits of the strategy? ›

Competitive Advantage: A strategic plan allows organizations to foresee their future and to prepare accordingly. Organizations that plan strategically are better equipped to predict the market, anticipate changes, understand competitors, and make decisions that keep them ahead.

Is it better to buy and sell or hold? ›

Change in Fundamentals

If it turns out that the company isn't performing as planned, you might want to consider selling the stock before the financial situation gets worse. A buy and hold strategy only works if your research is correct and the company continues to execute its business plan and generate earnings.

Is buying and holding better than trading? ›

Research shows that long-term buy-and-hold tends to outperform, where market timing remains very difficult. Much of the market's greatest returns or declines are concentrated in a short time frame.

Is buying hold a good investment? ›

Throughout history, gold has been seen as a special and valuable commodity. Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier. As a global store of value, gold can also provide financial cover during geopolitical and macroeconomic uncertainty.

What is hold strategy used for? ›

a course of action appropriate for a product (usually in the decline stage of its life cycle) in which a company decides to hold by keeping expenditure on it to a minimum to maximise the return before having to delete it from the line.

What is the difference between buy hold and sell? ›

A “buy” rating means analysts like the stock and think it's worth purchasing because its value is likely to increase. A “hold” rating is neutral. It means analysts are unsure which way share prices will move, so they recommend that you neither buy nor sell. A “sell” rating means analysts expect share prices to fall.

What is the buy-and-hold strategy in portfolio management? ›

The buy and hold strategy encourages investors to maintain a disciplined approach, reducing the influence of market fluctuations and emotional biases on investment decisions. Tax efficiency: Holding onto investments for the long term in India can offer tax advantages, particularly with regard to capital gains tax.

Which of the following is an advantage of holding bonds versus stocks? ›

Bonds tend to rise and fall less dramatically than stocks, which means their prices may fluctuate less. Certain bonds can provide a level of income stability. Some bonds, such as U.S. Treasuries, can provide both stability and liquidity.

What are the advantages of holding common stock? ›

Common stocks, abbreviated as common shares, can generate returns at a high rate. The common shareholders possess all the rights to claim the company's assets in the event of the company's liquidation after they have paid to shareholders, bondholders, and other debt holders in full.

What are the advantages of holding stock in a company versus holding bonds issued by the same company? ›

The chief advantage stocks have over bonds, is their ability to generate higher returns. Consequently, investors who are willing to take on greater risks in exchange for the potential to benefit from rising stock prices would be better off choosing stocks.

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