Is buy and hold investing dead?

The simple answer is: no, it is not!

However, to answer this more thoroughly, we need to examine what “buy and hold” investing truly means. It’s not about simply purchasing the top-performing stocks and holding onto them for ten years, hoping for a rise in price. Like any strategy, careful consideration must go into both which stocks to buy and when to buy them. In fact, timing the purchase – when to buy – might be just as important, if not more so, than the choice of stocks themselves.

Timing the purchase: Shop for a discount

Just like any purchase, it’s wise to “shop around” for a discount. In the world of stock investing, shopping around means timing your entry into stocks or ETFs, not looking for cheaper platforms. While the cost of executing trades is largely the same across different platforms, the price of the stock can vary depending on when you make your move.

The key is to buy stocks near the bottom of a downturn in price. Though it’s nearly impossible to pick the exact bottom, being patient and waiting for a temporary price dip within a broader uptrend can set you up for success.

Competing with bots and algorithmic trading

In today’s market, you’re also competing with bots and algorithmic trading, which has a direct impact on stock price volatility. Stocks tend to experience higher volatility when automated trading systems are in play. As a result, it’s essential to adjust your exit strategies to accommodate this increased fluctuation.

Additionally, today’s companies are less stable than before. While some industries – like banking and essential utilities – may have more stability, others, like non-utility energy and mining stocks (e.g., lithium), can experience rapid changes in value. For investors using a buy and hold strategy, staying informed and paying attention to the stability of your holdings is more critical than ever.

Buy and hold as a tax strategy

Long-term investing is often used as a tax strategy, as holding stocks for extended periods can reduce tax liabilities. However, it’s important to note that tax considerations can vary depending on individual circumstances, so seeking advice from a tax expert is recommended.

Key characteristics of buy and hold stocks

For buy and hold investing to work, the companies you choose should have several key traits:

• A competitive advantage over their rivals
• Strong earnings and earnings growth
• Manageable debt levels that won’t hinder expansion

While we’re not delving into a detailed analysis of company fundamentals, the basic principle is clear: strong growth, low debt, good management, and a stable product are essential for long-term investments. For example, a major bank is likely to be around in 10 years, but can the same be said for a rare earth miner?

Reasons for buy and hold investing

There are several advantages to adopting a buy and hold approach. One major reason is that it can reduce the need for daily or weekly monitoring of positions. Another is the potential to capture dividends over time. However, it’s crucial to time your entry and exit points to optimise returns. Purchasing at a discount and selling when prices are high can significantly improve the outcome of your trade.

Stop losses: How to manage risk

A stop loss is an automated sell order set by your broker. If the stock price drops to a certain threshold, your position will close automatically. But if the investor wants to keep the trade open, how should they handle this?

A common strategy is to set a 20-30% stop loss or trailing stop. However, before doing so, check the stock’s price chart to ensure that a 20-30% stop loss aligns with the stock’s typical volatility.

Additionally, fundamental stops can be used – such as closing a position if the company’s competitive advantage diminishes or its revenue falls below a certain threshold. Monitoring key metrics like P/E, EPS, or Beta may also guide decisions.

Hedging with options 

Some investors use options to hedge their stock positions rather than selling the stock outright. However, options trading is an entirely different strategy, and not every investor will choose to incorporate it into their buy and hold approach.

The bottom line: Buy and hold is work

While buy and hold investing should never be seen as a passive, hands-off strategy, it can still be effective if used wisely. It’s not a shortcut to success. If avoiding the work that goes into successful trading is your goal, you should reconsider the approach. But for those who are prepared to do the research, time their entries and exits strategically, and stay vigilant, buy and hold investing can still be a powerful tool in today’s market.

Trade Radar stock forecasting software helps you identify the best times to buy, hold and sell.