Buy and Hold Stock Trading Strategy

Overview

Buy and Hold is a basic investing strategy where investors buy and hold a security for an extended period of time. The belief is that it is better to allow a security the opportunity to grow over time, versus attempting to trade in and out of a stock for quick gains. Buy and hold traders see stocks as investments and are not concerned with timing each move. The logic behind the strategy is that the economy will grow overtime and by avoiding selling during normal cyclical downturns, a trader will ultimately be more successful over a multi-year timeframe. There have been a number of studies done which show that over the long run, stocks outperform any other investment (real estate, bonds, etc.). Until the advent of hedge funds, many large money managers believed that it was silly to move in and out of the market due to increase commissions and the risk associated with each new trade.

Selecting Stocks for a Buy and Hold Strategy
In order to get the most out of a buy and hold strategy, the odds are stacked in your favor when trading the strongest stocks. An investor should first start out by identifying the strongest performing index. The next step is to target the strongest stocks within that respective sector. This basic top down approach will ensure that the trader is purchasing into a stock with the greatest chance of growth potential.

Negatives
The buy and hold strategy may give the appearance of a safer investment model, but it, like every other strategy is not above the element of risk. For example, traders that bought Microsoft 8 years ago, would have made less than 2% on that investment. The other buy-and-hold killer is bear markets. If a buy and hold trader purchases a stock prior to a swift market decline similar to the ones in ’87 and ’02, the trader may have to wait 5-10 years to breakeven on their initial investment. The last sour note for the buy and hold strategy is the fact you have to buy and hold. Making money in the market is not like working a job where more effort equals greater results. So, traders will have to fight the urge to overtrade, as the key to a successful buy and hold strategy is quality not quantity.




Benefits
Buy and hold strategies have the following benefits:
  1. Less Stress – by trading fewer stocks and not concerning oneself with every price movement, it makes it easier for a trader to follow their trading plan and stay the course.
     
  2. Taxes – since buy and hold strategies often call for a time horizon greater than 1 year, traders are taxed at a lower tax bracket.
     
  3. Commissions – active trading can prove costly. Traders can easily rack up commissions in the tens of thousands each year, even with a discount broker. A Buy and Hold strategy can allow a trader to invest large sums of money with minimal costs. With many brokers offering $9.99 per trade for an unlimited number of shares, the buy and hold strategy has never looked more appealing.


Opinion
This is the strategy that is pretty much used by the big mutual funds and was a very successful strategy during the boom years of the USA economy from after the end of the 2nd world war until about 2000. Unfortunately this is now 2009 and world economics have changed, the world is now a much flatter playing field and the USA no longer has world trade dominance like it enjoyed after the WWII ended. There is also the USA national debt, the internet, a global ring of very high speed optical fiber internet connections and the wide spread use of cheap PCs. In other words, the buy hold strategy is, in general, outdated, because there is no good reason to believe that the USA stock market will continue to keep on growing given the new world order.




Sources and Additional Information:

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