Chapter 4: Basic Market Strategies
Buy and Hold
The buy-and-hold strategy is one of the most well-known and easiest strategies to use. It’s as simple as it sounds: you choose a few stocks, buy them, and then hold onto them for a long time until you reach your goal. Of course, you might sell or buy one or two stocks along the way, but the basic principle of this strategy is to hold onto your investments.
Strategy Key
The key to a successful buy-and-hold strategy is patience, unemotional decision-making, and thorough stock analysis. Patience is self-explanatory. Being unemotional is crucial during market downturns or turbulence, as selling in these situations can be disastrous to the strategy. Serious analysis is always important but even more so in a buy-and-hold strategy. Do it right once, as these stocks will likely be held for over 20 years.
Pros
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One of the biggest pros of the buy-and-hold strategy is that it's a proven method that has worked since the inception of the markets. Historically, the market has always moved upwards and is likely to continue this trend, making it hard to lose money in the long term.
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Another advantage is that it's a very easy strategy to implement, with the only challenging part being the initial analysis. After that, it's simply a matter of buying and not touching your investments.
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It's a very long-term oriented strategy, which we appreciate because it means there are sustainable gains and not just a reliance on luck.
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Buy and hold is the most hands-free strategy available, making it perfect for individuals with little to no time on their hands who still want to invest in stocks.
Cons
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You can't always sell stocks whenever you want, as a market crash could cause you to temporarily underperform and possibly even lose money.
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In the short term, this strategy is closer to gambling than a solid strategy. Buy and hold truly needs several years to show its full effectiveness.
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Because this strategy requires a few years to work, it's hard to tell if you did it right in the short term, which could cost you valuable investing time if adjustments are needed.
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Some markets actually decline and don't recover, making them suboptimal for this strategy. China is an example of such a market. This limitation reduces the number of viable market choices when using the buy-and-hold strategy.