Buy and Hold

Definition

“Buy and Hold” is a passive investment strategy in which an investor buys stocks, bonds, or other assets and holds them for a long period regardless of fluctuations in the market. The belief behind this strategy is that in the long term, financial markets produce a good rate of return despite periods of volatility or decline. This strategy relies on the concept that time, rather than timing, is the key to building wealth.

Phonetic

The phonetics of the keyword “Buy and Hold” is /baɪ ænd hoʊld/.

Key Takeaways

Buy and Hold is a popular investment strategy that can yield significant results. Here are three main takeaways about it:

1. Passive Approach: Buy and Hold is a passive investment strategy. Instead of actively trading shares to take advantage of market fluctuations, investors buy stocks and hold them for a long period regardless of the variations in the market. The idea is that, in the long run, financial markets give a good rate of return despite periods of volatility or decline.
2. Reduced Transaction Costs: With this strategy, transaction costs could be significantly lower. Actively trading stocks could generate plenty of brokerage commission fees. Since Buy and Hold investors make fewer transactions, they tend to incur lower fees.
3. Long-Term Growth: Buy and Hold strategy is focused on long-term capital growth. Instead of making money through short-term trades, this strategy depends on the concept that certain investments will grow in value over a long period. Therefore, market volatility in the short term does not concern Buy and Hold investors as much.

Importance

The business/finance term “Buy and Hold” is important as it represents a long-term investment strategy focused on the principle of purchasing stocks or other securities and retaining them for a significant period of time regardless of price fluctuations. The underlying belief of this strategy is that in the long run, financial markets will provide a good rate of return despite short-term volatility or fluctuations. It encourages investors to ignore the usual tendency to react to the market’s short-term sentiment and to resist the impulse of selling during downturn periods. Furthermore, this strategy can be less stressful and less time-consuming compared to frequent trading, also potentially minimizing the transaction costs. Therefore, ‘Buy and Hold’ plays a critical role in the financial market, promoting a sustainable and patient approach to investment.

Explanation

The primary purpose of the buy and hold strategy in finance and business is long-term investment growth. It’s a passive investment tactic applied by investors who believe that long-term returns can be more substantial regardless of short-term market fluctuations. Rather than looking for quick gains through frequent buying and selling, those who effect the buy and hold strategy purchase securities and retain them for a significant period, often up to several years or even decades. The purpose is not just to gain from the probable price appreciation of securities over time, but also to benefit from compound interest, dividends, and stock splits – all of which can add to the total return over the long term.The buy and hold approach is used mainly because it has the potential to yield high returns over a longer horizon. It saves the investor from the stress of constantly tracking the market, making decisions based on the short-term volatility which is an inherent characteristic of financial markets. It also effectively helps in mitigating transaction costs associated with frequent trading, and can potentially lead to favourable tax treatments because long-term capital gains are usually taxed at lower rates. It’s ideal for investors who have a high risk tolerance, and are patient enough to wait out inevitable periods of market volatility.

Examples

1. Warren Buffett and Berkshire HathawayPossibly the most famous example of a successful buy-and-hold strategy is the one employed by Warren Buffett. The success of Buffett’s investment strategy has resulted in huge returns for Berkshire Hathaway, the multinational conglomerate holding company he chairs. He has been known to take large positions in companies such as Coca-Cola and Apple and hold them for many years – sometimes even decades.2. Benjamin Graham and the Intelligent InvestorBenjamin Graham is often referred to as the “father of value investing”. His book, “The Intelligent Investor” , suggests a buy-and-hold strategy focusing on long-term investment and discourages frequent trading. Graham gained substantial wealth through his long-term holdings in undervalued companies.3. Amazon Long-Term Shareholders: Investors who bought Amazon stock in the late 1990s and held onto it have seen massive returns. For example, if an investor bought $10,000 worth of Amazon stocks in 1997 during its initial public offering, their investment would now be worth millions, even after the tech crash of the early 2000s. Despite the company’s volatile stock price, the overall trend has been upward, greatly rewarding those who have held onto their stocks.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Long-Term Investment
• Capital Gains
• Portfolio Diversification
• Passive Investing
• Equity Ownership

Sources for More Information

• Investopedia
• Morningstar
• Fidelity
• The Motley Fool