Buy and hold
Encyclopedia
Buy and hold is a long-term investment strategy
based on the view that in the long run financial market
s give a good rate of return
despite periods of volatility
or decline. This viewpoint also holds that short-term market timing
, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work; attempting 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 of the strongest arguments for the buy and hold 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.
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. 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. Some may argue that Warren Buffett is a long-term market timer.
Investment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio...
based on the view that in the long run financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
s give a good rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
despite periods of volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
or decline. This viewpoint also holds that short-term market timing
Market timing
Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis...
, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work; attempting timing gives negative results, at least for small or unsophisticated investors, so it is better for them to simply buy and hold.
The antithesis
Antithesis
Antithesis is a counter-proposition and denotes a direct contrast to the original proposition...
of buy-and-hold is the concept of day trading
Day trading
Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day...
, in which money can be made in the short term if an individual tries to short
Short selling
In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...
on the peaks, and buy on the lows with greater money coming with greater volatility.
One of the strongest arguments for the buy and hold strategy is the efficient-market hypothesis (EMH): If every security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
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.
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. Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
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. Some may argue that Warren Buffett is a long-term market timer.
External links
- Never Sell: Buy and Hold Forever (Efficient Market Canada, Investment Magazine)
- The Buy and Hold Apocalypse: Motley FoolMotley FoolThe Motley Fool is a multimedia financial-services company that provides financial solutions for investors through various stock, investing, and personal finance products. The Alexandria, Virginia-based private company was founded in July 1993 by co-chairmen and brothers David and Tom Gardner, and...
article - John Bogle, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, Dell, 1994, ISBN 0-440-50682-4
- Mark T. Hebner, Index Funds: The 12-Step Program for Active Investors, IFA Publishing, 2005, ISBN 0-976-80230-9
- Interactive Java Applet "'Buy and Hold' - How much can you make over longer time periods?"