Buy and Hold

What is the buy-and-hold strategy?

Buy and hold is a long-term investment strategy in which shares or other assets, such as funds, are bought and held for a long period, typically several years, without reacting to short-term price fluctuations. It is based on the assumption that most shares, and the stock market as a whole, are in a long-term uptrend, so that patient investors benefit from rising prices over time despite interim setbacks.

How it works

Buy-and-hold investors select their shares carefully and pay particular attention to revenue growth and dividends. Once bought, a position is kept; there is no attempt to time the market through frequent buying and selling. For example, an investor buys shares in a company for $5,000 and holds them even through a temporary loss of 20%, as long as the company's prospects remain intact, collecting the dividends along the way. Because there are few transactions, trading costs stay low and little time is needed to monitor the market.

Buy and hold versus active trading

The strategy also has weaknesses: in a prolonged bear market, losses can last for years, and individual companies can lose their value permanently. For this reason, buy and hold is often combined with diversification.

For active traders who manage their positions over days to a few weeks, buy and hold plays little role. Leveraged CFD positions are also poorly suited to it, because positions held overnight usually incur financing charges (swaps) that add up over long holding periods. However, the performance of a buy-and-hold approach is often used as a benchmark for active strategies.