Buy-and-hold investing is an age-old strategy backed by the likes of Warren Buffett and Jack Bogle. Learn more about its advantages and disadvantages here.
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As an investor, you hope to earn a positive return on investment by buying financial assets at a low price, watching them appreciate and selling them at a higher price.
You can opt to closely follow the short-term price fluctuations of your assets and sell them after a certain percentage increase. Although you have the potential to gain quicker rewards from immediate trading, it may be unpredictable. You may also cumulatively end up paying more in transaction fees every time you buy and sell shares.
An excellent alternative to immediate stock trading is buy-and-hold investing - an investment strategy that can potentially provide you with a long-term source of income.
Here is further insight into the pros, cons, and means of executing a buy-and-hold investment strategy.
In this article:
Buy-and-hold investing is a passive strategy that first entails purchasing stocks, securities, and other financial assets like real estate. You then hold onto these investments, awaiting medium- or long-term returns while ignoring short-term fluctuations in their market price.
The strategy helps you maintain a stable portfolio of assets while expecting capital appreciation over time.
Investors who follow the buy-and-hold approach are confident that they will earn higher returns in the future. The rise of Bitcoin is a real-world example of a successful buy-and-hold outcome. The price of a single Bitcoin on April 30, 2014, was $446.89.
On April 30, 2022, the digital cryptocurrency was valued at around $38,629, representing more than an 8,500% price increase after eight years.
The financial asset went through price fluctuations throughout the time frame. However, buying and holding onto the asset proved to be a better strategy than selling it in the short term. You, too, can earn considerable returns with the right buy-and-hold strategy.
Warren Buffett, the chief executive of Berkshire Hathaway and one of the world’s wealthiest people, is a renowned proponent of the buy-and-hold approach. Jack Bogle, the founder of the Vanguard Group, also supported this strategy. In addition to being an ideal long-term source of returns, below are additional advantages of this investment approach.
As a buy-and-hold investor, you mainly buy financial assets and wait for your investment to grow - and is much less work and stress than swing trading or day trading which requires buying and selling strategies that require market timing and fast decision-making.
With buy-and-hold, you don’t have to keep looking for the most recent price data or pay as much attention to quarterly earnings reports. You can also avoid the hassle of performing regular technical and fundamental analyses or responding to short-term market events.
A buy-and-hold investment strategy aligns with the Efficient Market Hypothesis (EMH), which suggests that most information regarding an investment is already factored into the asset’s market price. The hypothesis counters active investing, in which you need deep knowledge and research skills to exploit the market.
The buy-and-hold strategy may also follow the fundamental analysis approach. In this scenario, value investors attempt to find assets at a low price, but with the potential to appreciate.
For example, the median sales price of houses sold in the United States rose over 2,400% from $18,050 in 1963, to $454,525 in 2022. Real estate is a classic example of an asset you can buy and hold onto for long-term success.
In some countries, like the U.S., long-term dividends and capital returns are taxed at a lower rate than short-term gains. There are also instances when the tax is assessed only when an asset is sold. Even when you finally decide to sell your shares, you can do so in a manner that lowers your tax liability. The tax rate may end up being as low as zero, depending on your filing status and taxable income.
Also, because you aren’t actively engaged in the buying and selling of assets, you can save considerably on transaction fees and commissions.
Buying and holding assets in pooled funds can be a relatively cost-effective way to build your financial portfolio. Instead of paying as an individual, members of the pooled funds share the tax implications.
Buy-and-hold investing does have a few drawbacks.
One of the best opportunities to buy more stocks arises in a volatile market.
A sudden fall in a stock’s price provides you with an excellent chance to purchase shares at a discount. A sharp rise can entice you to capitalize by selling. Active investors engaged in swing trading or day trading mainly benefit from short-term volatility.
A huge opportunity cost can accompany buy-and-hold investments as they tie up your capital.
Unless you have extra money to spend, you can’t take advantage of short-term purchasing opportunities. Although you will be commended for having great resolve in not chasing every price change, you will sometimes miss out on attractive buying options.
To take part in buy-and-hold investing, you need to do the following.
Buy-and-hold investment strategies have the potential for securing long-term returns, however require on a successful decision on asset selection.
In real estate, choosing the right property, real estate investment trusts (REITs), or private real estate deal is key, as buying and holding a bad investment won't get you the returns you want.
By working with professionals or experts - this can help limit investing mistakes.
Active trading involves navigating the highs and lows of the market by buying shares during downturns and selling during surges.
This strategy may be tricky to implement in an especially unpredictable market. In the buy-and-hold strategy, timing isn’t crucial to long-term success, as the critical factor is the amount of time for which you hold onto the shares.
A look at two hypothetical S&P 500 ETF investments made over a 20-year time frame reveals some interesting findings. One investor averaged 9.16% in average annual returns by investing $10,000 on the market's lowest day every year. The other investor earned 6.9% in average annual returns by investing the same amount at the market's highest point every year:
Even with the unluckiest investment timing, you still come out on top with continued investing over a chosen duration. The trick to buy-and-hold investing lies in perseverance, as positive outcomes tend to occur more often over longer time frames than shorter ones.
In this video, you’ll learn the different types of real estate investments including:
Real estate investing is renowned for providing a passive cash inflow and having a strong edge against inflation.
It also allows you to expand from conventional investments like bonds and stocks. Buy-and-hold investing in real estate involves purchasing physical or tokenized property and retaining possession for an extended period.
Although you intend to sell the property in the long term, you can earn extra income by renting it out during the holding period. To identify the best buy-and-hold real estate property, you need to consider the appreciation potential and rental potential. The ideal property will earn you a decent monthly revenue stream while concurrently appreciating over time.
There are numerous types of properties to choose from, like vacation rentals, single-family homes, multifamily buildings, turnkey real estate, and commercial real estate. You can opt to work with HoneyBricks to avoid the hassle of:
HoneyBricks is a platform that links you with top-notch commercial real estate opportunities via asset-backed tokens.
The use of blockchain technology improves liquidity and eases the transfer of assets while ensuring market security, transparency, and proof of ownership.
By bringing in experience from areas like real estate, cryptocurrency, technology, capital markets, and compliance, you can rest easy, knowing your investment is under expert management.
Learn the secrets of passive investing in multifamily and how investors are compounding their net worth.