The Buy & Hold investing strategy is one of the most popular. In this post I tell you how it works, why we should consider it, and how we can implement it.
- What is the Buy & Hold investing strategy?
- Assets we can invest in as part of Buy & Hold
- 5 Advantages of Buy & Hold Investing
What is the Buy & Hold investing strategy?
The Buy & Hold strategy is one of the main pillars of long-term investing. Buy quality assets with good potential and hold them for long in your portfolio. Long-term investing is as simple as that.
Keep in mind that time is the best ally for investors. Investing for the long term is about being optimistic about the future of humanity. It does not really matter what happens to the economy in the short term. Our goal is to be part of and benefit from future global economic growth. And the Buy & Hold strategy is great for that.
In this post we are going to focus mainly on implementing the Buy & Hold strategy in the stock market. But keep in mind that Buy & Hold is much more than that. In fact, it as an investment philosophy. And, as such, it is also applicable to other types of investments, such as real estate or precious metals.
Assets we can invest in as part of Buy & Hold
As I just mentioned, we will focus on the Buy & Hold strategy with shares. This means we can either invest in stocks directly or in passive investment vehicles such as ETFs and index funds. Let us see what criteria both stocks and funds must meet to make them appropriate investments for buy & hold:
Remember that the Buy & Hold investing strategy consists of buying quality assets and holding them for the long term. Ideally, we would keep those assets in our portfolio forever. If we have chosen good companies and funds, why would we want to sell?
The most famous Buy & Hold investor is Warren Buffett. Although he has been one of the most successful investors in history when it comes to finding undervalued companies with a lot of potential, Warren Buffett himself admits that a good portion of his success can be attributed to the fact that he has been invested for a very long time. As a result, their investments have had multiple decades to grow and compound.
As a result, if we choose to invest in individual companies directly, the fundamental principal we have to keep in mind is that we should buy shares of quality companies. Quality companies are those whose businesses are likely to remain successful in the future.
There is no way to know for certain that a company will remain successful forever. But there are several characteristics we should look for when deciding which stocks we want to invest in.
The ideal stocks we would like to Buy & Hold are those with a strong market position, solid and growing revenues, good commercial margins, excellent management history and low debt.
Realize that many types of businesses can fit that description. And that is a great thing, since it will allow us to build a diversified portfolio, something very important when carrying out the Buy & Hold strategy successfully.
Thus, we will find companies of various sizes (although quality companies tend to be generally large), different sectors, many countries, with different growth rates, dividend and non-dividend paying, etc. That variety and diversification will allow us to sleep peacefully at night.
Some examples of companies that may come to mind when thinking about Buy & Hold investing would be Apple, Coca-Cola, Amazon, Toyota, Sony, Nestlé, Roche, SAP, Allianz, Iberdrola and L’Oréal.
We can be quite confident that most if not all of them will still exist and be profitable in 10, 15 or 20 years.
ETF and Index Funds
The other way we can implement a Buy & Hold investing strategy is through ETFs and index funds. These funds replicate the main stock market indices, making them a very efficient way of investing in all companies in the index.
If you want to read a comparison between ETFs and index funds, check out the following link:
Comparison between Index Funds and ETF
For example, if we want to invest part of our portfolio in the United States, we can simply buy an ETF that tracks the S&P 500 index. The S&P 500 represents 500 of the largest companies in the United States, of very multiple sectors and sizes.
These passive funds are great for Buy & Hold investors for several reasons:
First, because the time required to implement our strategy is minimal. Once we have chosen in which indices we want to invest, we can make recurring contributions and forget about it.
In fact, if you do not even want to have to choose which indices you want to put your money in, you can opt for the MSCI ACWI World Stock Index, composed of more than 3,000 companies from both developed and emerging countries. If you want to know more about this index, I leave you the link to the official website.
Second, tracking an index is a solid strategy for long term investors because, by its very nature, an index can never go bankrupt. A company can go bankrupt, but the index cannot as it is made of many companies. That means we can more or less forget about our portfolio. And while it is true that some of the companies in the index can go to 0, that is unlikely to happen as I explain to you next.
Stock market indices are rebalanced on a regular basis. This means new companies join the index, and others exit it. New companies are usually growing and represent new sectors of the economy. Companies leave the index when their businesses are in decline. As a result, tracking an index is a good way to automatically keep our portfolio up-to-date and purge bad companies
5 Advantages of Buy & Hold Investing
Let us discuss next the main advantages of following the Buy & Hold strategy:
1) Good returns
The most important thing when investing for the long run is protecting and increasing the value of our wealth. And let us keep in mind that the best ally of any long-term investor is time. As a result, Buy & Hold is one of the best investment strategies to achieve good returns.
Investing for the long term makes the probability of losses very low. And, best of all, it will make it possible for your investment returns to compound. This is facilitated by the following facts:
On the one hand, the world economy has always tended to grow in the long run. Humans are interested in doing things better and cheaper. That innovation is translated into economic growth. And companies that participate in the economy benefit from that growth.
On the other hand, the design of our monetary system causes the price of assets (stocks, real estate, gold, etc.) to rise in the long run. While this does not represent a gain in real terms, being invested in assets that keep up with inflation protects us from the flaws of the monetary system.
The second advantage of the Buy & Hold strategy is another great ally of investors: diversification. As mentioned before, the ideal stocks and funds for a Buy & Hold portfolio are those that we buy today and hold forever.
A necessary requirement for a successful Buy & Hold portfolio is that it needs to be diversified. That can be achieved by investing in different types of stocks that meet our quality criteria. Or, even more simply, by investing in multiple ETFs or index funds.
3) Low risk
If we have executed our Buy & Hold strategy well and really invested for the long term, the level of risk is really low. This is just a natural consequence of investing in a diversified way over the long term.
Whichever way you look at it, there is little risk in investing our money in the best companies in the world and simply waiting. And even less risk if instead of investing everything at once, we make recurring purchases. This is known as dollar-cost averaging and works marvelously with Buy & Hold.
4) Simple and effective
Another feature we can highlight is that we do not need to constantly adjust our portfolio if we follow a Buy & Hold investing strategy.
In fact, if we do it through index funds and ETFs, we do not even have to pick which companies to invest in. In that sense, all we have to do is choose which markets we want to invest in, find funds that track them, and invest. Or simply put our money in a product tracking the MSCI ACWI stock index.
5) Low costs
Finally, it should be noted that Buy & Hold investing is one of the best strategies to minimize costs. And that is true regardless of whether we invest directly in stocks or in passive funds.
In the case of individual stocks, if we buy them for the long run and practically never sell them, the costs are almost 0. Transaction costs will be tiny, and we would have to pay no management fees. The only cost we may have is related to taxes on dividends received.
In the case of funds, we must remember that both ETFs and index funds have very low management fees. This can be somewhere between 0.1 and 0.2% of our capital base every year. A very modest cost for the convenience of not having to pick companies individually.
And another great feature of many index funds is that dividends are reinvested. This means that whenever a company in the index pays a dividend, the company in charge of the fund will automatically buy more shares of the companies in the index.
Following the Buy & Hold investing strategy will not make you a millionaire overnight. But it will make it possible to achieve very good long-term returns. Becoming a millionaire with Buy & Hold is a function of how much money we invest, how long we are invested, and the normal ups and downs of the market.
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