Buy and hold approach rests upon the assumption of in the long run; five or more years, stock prices will increase.
One hundred years of stock market historical data support this fact; stock prices have consistently increased with a few recessions in between.
The logic behind this rise is that in a capitalist society, the economy will keep on expanding and profits will subsequently keep on growing.
Consequently, both stock prices and stock dividends will increase as well. Short term stock price fluctuations are unavoidable because of business cycles or rising in inflation. But in long term, the market as a whole will rise.
Buy and hold types of investors are usually sell their stocks when they have reached their financial goals. The goals might be making enough money for retirement, children’s education or buying own house.
But from what I have observe nowadays, most investors put most of their effort into buying stocks, a little into selling them, but none into owning any of them. This might be because, as soon as they buy some stocks, they promptly turn their attention to the next candidate.
To them, buy and hold is so boring.
Another school of thought supports buying and holding stocks is without fundamental values as they believe that as long as investors hold the stocks for a long period of time, they are guaranteed to make money. This is another shallow interpretation of buy and hold strategies.
The long term stock investing approach should focus on selecting quality companies with current market values that are at a bargained price. By accumulating these stocks selectively over time and holding them, not only do we minimise transaction costs but also maximise the possibility of enjoying long term returns. In other words, you should not hold stocks for the sake of just holding them.
Now, let see why some stock investors failed to make money using buy and hold approach.
Firstly, if they need the money urgently (for example, retirement money) in a couple of years, holding stocks may not be the best thing to do. These buy and hold approach depends on how much time you are willing to wait before cashing in the stocks.
The average compounded return in stock market is between eight to 15 per cent per year. If you hold the stock for more than ten years, your stock performance is most likely will be much closer to these historical annual returns. However, if you hold stocks for less than a year, the chances of you losing money are very high.
Secondly, regardless of how cheap some stocks may be and how long they are kept, buying bad stocks will only hurt your portfolio. Buying bad stocks at a very high price is even worse!
Imagine that you have bought Internet-related stock for $130 whereas their intrinsic value is only $3; you may never ever gain any profit regardless of how long you hold on to it. Therefore, another key to using this method is buying very high QUALITY stocks.
If you do not buy only quality stocks, in the long run, your portfolio of poorly chosen stocks won’t outperform the money left under your pillow.
As you can see, successful long term stock investing has very much to do with buying QUALITY stocks and holding them over LONG period of time.
I will not buy a stock just because it is cheap in price, but we should be the bargain hunters looking for quality stocks that sell at an attractive price.
Value for your hard earned money.
Thus, the key in long term stock investing is patience. A good start is ten years (or at least make it five years). But if you do not have that much time, the buy and hold technique may be risky for you.
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