Buy and Hold Strategy: What it is and How to Use it

There are many investment strategies you can use in the financial market. We look at the buy and hold strategy and how you can use it to invest. In this article, we will look at whether it is a good investment strategy for investors.

How to profit from the finance industry

The finance industry is one of the largest one in the world. The industry is divided into a number of areas like insurance, brokerages, asset management, banks, and advisors. Each of these subsectors operates in various ways. For example, in banking, there are investment banks and retail banks.

The same is true when you look at the asset management industry. There are asset managers like Warren Buffett who believe in buying assets and holding them for a long time. There are short-term managers like James Simmons who believe in buying and exiting within a short duration.

What is the Buy and Hold Strategy?

As the name suggests, a buy and hold investing strategy is one where the investor is interested in the long-term of a company or any other asset. Their goal is to buy at a lower price and exit the investment when the price rises. A good example of this strategy in action is Warren Buffett’s investment in Coca-Cola in 1986. Over the years, he has continued holding his stock in the company because he believes in it.

Buy and hold is often also seen as the best strategy when investing in Bitcoin, which is extremely volatile but has shown incredible returns over a 4-year time period. Buy Bitcoin and hold it for a minimum of 4 years.

Why Investors Use Buy and Hold Strategy?

There are a number of reasons why many investors use the buy and hold strategy. Some of these are:

  1. They believe in the company. Investors who use the buy and hold strategy have a strong belief in the company. They believe that the company will continue doing better in the future.
  2. Room for growth. These investors believe that the company has more room to grow. For example, in a company like Alphabet, investors believe that it will find success beyond search.
  3. Good management. The quality of management helps to determine the success of a company. Buy and hold investors believe in the management strongly.
  4. Dividends. Most buy and hold investors do so because they want to continue getting dividends from the company.
  5. Acquisition target. Another reason for buying and holding is that the company will be acquired by another company. In the past, many investors who have bought and held US stocks have had excellent returns. This is because the value of the US stock market has more than doubled in the past five years alone.

How to Use the Buy and Hold Strategy

The type of analysis that you do when thinking of buy and hold strategies is different from the one you do for short-term investments. In the latter, the main focus is on the current price of the asset. With buy and hold, you do a more comprehensive study. The steps below show how you can analyze these companies.

  1. Look at the products the company sells. In this, you want to imagine the future of these products. If you believe that there is a bright future for the product or service, go to the next step.
  2. Look at the competitive advantage of the company. After looking at the products, look at the competitive advantage the company has in the industry.
  3. Look at the management. The management of the company can help you determine its future. Consider a company with a long track record of having a good slate of managers.
  4. Consider its valuation. Valuation is important because you don’t want to overpay for a company. As such, use the various valuation methods to find whether the company is overvalued or not.

Risks of Using a Buy and Hold Strategy

A buy and hold strategy has made people like Warren Buffet and Ray Dalio very wealthy. However, it also comes with its own risk. Some of the risks of using the buy and hold strategy are:

  • Market might change. A good example of this is that of Coca-Cola. The company made a fortune in the flavored drinks’ industry. Today, most people in the US are avoiding flavored drinks because of their risks.
  • Hard to predict the future. It is very hard to predict the future of anything. For example, it is almost impossible to predict when a recession might happen.
  • Your assumptions might be wrong. For example, in valuation, there is a likelihood that your assumptions are wrong.
  • Hidden problems. A good company might have many hidden problems that might cost your investment a lot of money. A good example of this is General Electric, the fallen American giant.

Best Stocks to Buy and Hold

The best stocks to buy and hold are typically large, well-established companies with a strong track record of growth and profitability. These companies are often leaders in their respective industries, and they have a good chance of continuing to do well in the long term. Here are a few examples of stocks that are often considered to be good buys and holds:

  • Technology stocks: Technology companies are at the forefront of innovation and have the potential to disrupt entire industries. Some popular technology stocks include Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Meta Platforms (META).
  • Healthcare stocks: Healthcare is a growing industry. Healthcare stocks can be a good way to invest in the aging population and rising healthcare costs. Some popular healthcare stocks include UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and AbbVie (ABBV).
  • Consumer staples stocks: Consumer staples stocks are companies that sell products and services that people need regardless of the economic climate. Some popular consumer staples stocks include Costco (COST), Walmart (WMT), and Procter & Gamble (PG).
  • Financials: Financials companies provide the financial services that businesses and individuals need to operate and grow. Best stocks to buy and hold in the financial sector are JPMorgan Chase (JPM), Berkshire Hathaway (BRK.A), Visa (V), Mastercard (MA), and American Express (AXP).
  • Industrials: Industrial companies produce the goods and services that are used in a wide range of industries. Stocks that we believe you can buy and hold for long term include Caterpillar (CAT), Boeing (BA), 3M (MMM), Honeywell (HON), United Parcel Service (UPS), and Home Depot (HD).

Best ETFs to Buy and Hold

ETFs to buy and hold are typically low-cost and diversified. They also offer a variety of asset classes, so you can create an investment portfolio that meets your individual investment goals and risk tolerance

These are some of the best ETFs to buy and hold:

  • iShares Core S&P 500 ETF (IVV): This ETF tracks the S&P 500 index, which is a basket of the 500 largest publicly traded companies in the United States.
  • Vanguard Total Stock Market ETF (VTI): This ETF tracks the CRSP US Total Market Index.
  • iShares Core Total US Bond Market ETF (IUSB): This ETF tracks the Bloomberg US Aggregate Bond Index, which is a basket of all US investment-grade bonds.
  • Vanguard Total International Stock ETF (VXUS): This ETF tracks the FTSE Global All Cap ex US Index, which is a basket of all publicly traded stocks outside the United States.
  • iShares Core International Aggregate Bond ETF (IAGG): This ETF tracks the Bloomberg Global Aggregate ex-USD Index, which is a basket of all investment-grade bonds outside the United States.

Read also: How to Build Investment Portfolio from Scratch

Best REITs to Buy and Hold

REITs have all strong track records of performance and are well-positioned to benefit from long-term trends such as the aging population, the growth of e-commerce, and the rollout of 5G networks.

Here are some of the best REITs to buy and hold:

  • American Tower Corporation (AMT): American Tower is a leading provider of communications infrastructure, including cell towers and data centers. The company is well-positioned to benefit from the continued growth of mobile data usage and the rollout of 5G networks.
  • Prologis, Inc. (PLD): Prologis is a leading provider of industrial real estate, including warehouses and distribution centers.
  • Welltower Inc. (WELL): Welltower is a leading provider of healthcare real estate, including senior housing, skilled nursing facilities, and outpatient care centers.
  • Ventas, Inc. (VTR): Ventas is a diversified REIT that owns a variety of healthcare and senior housing properties.
  • Crown Castle International Corporation (CCI): Crown Castle is a leading provider of communications infrastructure, including cell towers and small cell sites.

Way Forward

A buy and hold strategy is used by many investors around the world. Indeed, most successful investors warn about the risks of short-termism. However, as shown above, the strategy needs some work. For example, you need to be flexible enough to change your mind on various things. Warren Buffett has been successful in this. A good example is when he exited his investment in IBM after the fundamentals changed.

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Crispus (BSc and MBA) is a finance professional with more than a decade experience as a financial analyst, writer, researcher, and trader. Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, Investing Cube and Seeking Alpha. He also runs a forex education firm. Follow him on Twitter: @crispusnyaga and read more about us.