The Buy and Hold Strategy: Does It Make Sense in Your Portfolio
The buy and hold strategy goes against timing the market. It rests on the premise that you can only go so far in timing the market’s good days and bad days. If you keep timing your investments, you will fail to see good opportunities on seemingly bad days. Since the stock market is constantly changing, there will always be a way for the cycle to go down and up. Buy and hold strategists do not flinch at the slightest volatility in the market, knowing that things will eventually change. Therefore, they choose the companies they invest in carefully. Buy-and-hold strategy requires the investor to make a commitment, despite the ups and downs of the market. Choosing the right assets to invest in is very crucial in this strategy.
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Buy and hold strategists also claim that stocks will outperform bonds and other investments, despite the generally highly volatile atmosphere in the stock market. Usually, 60% of the portfolio is devoted to stocks while the remaining 40% is invested in bonds, although the mix will still depend on the investor’s risk appetite. This passive investment strategy requires thorough evaluation of stocks because the quality of the investments is highly valued more than the timing.
Picking the Right Assets
Buy and hold investors do away with timing the market because luck still plays a big factor in timing, and depending on luck for benefits can backfire. Rather than paying attention to the health of the market, buy and hold strategists encourage paying attention to the health of the business itself. Growth stocks are the most attractive ones when it comes to this aspect. Profit and sales say it all. These are generally the “successful stocks”. But diligent investors will go beyond the profit and sales. Value stocks do not always have high profit and sales. Sometimes, value stocks may experience a dip in revenues because of shift in management. These stocks are normally the “undervalued” ones, the normal target of long-term investors if the prospects for these stocks are rosy. For instance, Matt Andrejczak of MarketWatch listed Chesaspeake Energy as one of the value stocks to look out for because its shares rose to 33% from 2012 to 2013 after its efforts in clearing the debts that it incurred under its former CEO Aubrey McClendon.
Picking the right stocks is every buy and hold strategist’s secret weapon, because it saves them the tedious timing process in the unpredictable stock market.
Why Some Investors Shy Away from Buy-and-Hold
Those who are not fans of this strategy fear that the buy and hold strategy is already outdated because a stable economy is very elusive nowadays. Just imagine the agony of investors who picked technology stocks in 2001, only to be greeted by the technology bubble in 2002. The 2008 financial crisis did not help either. For buy and hold skeptics, the waiting period for the stock prices to go up again is too excruciating. They fear incurring extraordinary losses while waiting for the stock market to go from bear to bull.
Addressing Buy-and-Hold Issues
The buy and hold strategy is not perfect because even the smartest investor cannot outsmart the unpredictable market. A lot of contributing factors beyond an investors control can threaten a portfolio, such as prolonged political instability. But it must be about time that the meaning of “long-term” in buy-and-hold be demystified. Long-term does not mean permanent. After all, smart investing requires occasional rebalancing from the investor. Buy and hold strategists should not practice blind faith because they also need to keep up with the changes in the market. And a company’s good prospects are only as good until it actually happens. Just because an industry looks promising doesn’t mean that it’s going to fare well in the stock market for a long time – take the case of the technology bubble more than a decade ago.
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If there’s one lesson that investors, regardless of their preferred strategy, can pick up from buy and hold, it is the emphasis on laying a strong foundation for the portfolio. That means
Buy and hold may or may not be suitable for novice investors. Timing the market is extremely difficult for beginners but so is choosing the right companies to invest in. However, between the two, a beginner ought to learn how to evaluate the right assets first before timing the market because the latter will safeguard the investor from temporary price spikes and dips that can greatly affect investor emotion.
To maximize the buy-and-hold strategy, an investor must:
- Pick the right stocks well. Stock allocation and preference must be geared toward long-term investment.
- Diversify. Do not put all your eggs in one basket. You will never know when crisis will hit a certain sector. Also, maintain a good mix of growth stocks and value stocks.
- Rebalance. Do not mistake long-term for permanent. It’s important to rebalance once in a while and assess if the chosen stock is still benefitting the portfolio.