What are the potential advantages in using a Buy and Hold investing strategy? For investors: ease of use; consistency with investment theory; promotes good investing habits. Buy and Hold also works well when combined with Dollar Cost Averaging (DCA) and a passive investment management approach. Strategies that I also recommend.
All that and more in Episode 53 on the Wilson Wealth Management YouTube channel.
“Why is Buy and Hold an ‘easy’ investment strategy?”
Buy and Hold is very easy. For investors to understand. To implement. And to maintain.
You identify an investment. Buy it. Then hold until you reach your financial objective’s time horizon.
Sometimes, Buy and Hold may be too easy. As we will discuss in future episodes.
“How is Buy and Hold consistent with investment theory?”
In prior episodes, we have seen that assets appreciate over time. If you buy and hold an investment, over the long term it will grow in value. The greater the investment risk of the asset, the greater the growth.
This is the main argument in favor of Lump Sum investing over DCA.
“How will Buy and Hold improve my investing habits?”
Much like we saw with DCA, Buy and Hold will improve investing consistency and discipline.
Without worrying about when to buy and sell an asset, Buy and Hold takes emotions out of the equation. Making the investment process more consistent and disciplined.
“Why does Buy and Hold work well with passive investing?”
Buy and Hold may be the ultimate passive investing strategy.
Buy an asset. Then hold it through the time horizon. With no trading, costs remain low.
Perfect for passive investors. Perhaps, too perfect (this is what is known as foreshadowing!).
“And DCA?”
Again, identify the “best in class” asset. Then, slowly add to that position over time using DCA. When you reach the financial objective’s time horizon, divest.
As part of DCA, this method will also help smooth out market volatility as you increase holdings.
“What about costs?”
A Buy and Hold strategy will have lower transaction costs than a more active approach.
It may also trigger fewer taxable events. If you hold your investments in a taxable investment account, every time you sell, you may incur (hopefully) a capital gains tax. The sooner you have to pay tax, the less cash you have available to reinvest and grow.
Under Buy and Hold, you will have fewer dispositions. Resulting in fewer taxable events. The longer you can let your wealth compound in your own accounts, and not the tax-man’s, the better.
As well, there is likely an opportunity cost that comes from actively trading. In “Episode 38: Investor Behaviour”, we saw the portfolio growth impact from minimal misses in timing the markets.
Between January 1, 1980 and December 31, 2018, had you missed out on just the 5 best market days of the S&P 500, your portfolio would have a 35% decrease versus being fully in the market the entire time. Missing the best 30 days out of 13,870? Your portfolio would be worth 81% less.
A Buy and Hold strategy might have been better than jumping in and out of the S&P 500.
If you wish to read a bit more on this topic, please see “Buy and Hold: Advantages”.
Next up, some perceived disadvantages of the Buy and Hold approach.
