Buy and hold, also called position trading, is an

investment strategy In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio. Individuals have different profit objectives, and their individual skills make different tactics ...

whereby an investor buys

financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market li ...

s or non-financial assets such as real estate, to hold them long term, with the goal of realizing price appreciation, despite volatility. This approach implies confidence that the value of the investments will be higher in the future. Investors must not be affected by

recency bias Recency bias is a cognitive bias that favors recent events over historic ones. A type of memory bias, recency bias gives "greater importance to the most recent event", such as the final lawyer's closing argument a jury hears before being dismiss ...

emotion Emotions are physical and mental states brought on by neurophysiology, neurophysiological changes, variously associated with thoughts, feelings, behavior, behavioral responses, and a degree of pleasure or suffering, displeasure. There is ...

s, and must understand their propensity to

risk aversion In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more c ...

. Investors must buy financial instruments that they expect to appreciate in the long term. Buy and hold investors do not sell after a decline in value. They do not engage in market timing (i.e. selling a security with the goal of buying it again at a lower price) and do not believe in

calendar effect A calendar effect (or calendar anomaly) is the difference in behavior of a system that is related to the calendar such as the day of the week, time of the month, time of the year, time within the U.S. presidential cycle, or decade within the cent ...

s such as Sell in May. Buy and hold is an example of

passive management Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becom ...

. It has been recommended by

Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American investor and philanthropist who currently serves as the chairman and CEO of the conglomerate holding company Berkshire Hathaway. As a result of his investment success, Buffett is ...

, Jack Bogle,

Burton Malkiel Burton Gordon Malkiel (born August 28, 1932) is an American economist, financial executive, and writer most noted for his classic finance book ''A Random Walk Down Wall Street'' (first published 1973, in its 13th edition as of 2023). Malkiel i ...

John Templeton Sir John Marks Templeton (29 November 1912 – 8 July 2008) was an American-born British investor, banker, fund manager, and philanthropist. In 1954, he entered the mutual fund market and created the Templeton Growth Fund, which averaged gro ...

, Peter Lynch, and

Benjamin Graham Benjamin Graham (; Given name, né Grossbaum; May 9, 1894 – September 21, 1976) was a British-born American financial analyst, economist, accountant, investor and professor. He is widely known as the "father of value investing", and wrote two ...

since, in the long run, there is a high correlation between the stock market and

economic growth In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...

Efficient-market hypothesis

According to the

efficient-market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...

(EMH), if every

security Security is protection from, or resilience against, potential harm (or other unwanted coercion). Beneficiaries (technically referents) of security may be persons and social groups, objects and institutions, ecosystems, or any other entity or ...

is fairly valued at all times, then there is really no point to trade. Some take the buy and hold strategy to an extreme, advocating that you should never sell a security unless you need the money. However,

is an example of a buy and hold advocate who has rejected the EMH in his writings, and has built his fortune by investing in companies when they were undervalued.

Lower costs

Others have advocated buy-and-hold on purely cost-based grounds. Costs such as

commission In-Commission or commissioning may refer to: Business and contracting * Commission (remuneration), a form of payment to an agent for services rendered ** Commission (art), the purchase or the creation of a piece of art most often on behalf of anot ...

s are incurred on all transactions, and the buy and hold strategy involves the fewest transactions for a constant amount invested, all other things being equal. Taxation law also has some effect; long-term capital gain taxes may be lower than those incurred from short term trading, and tax may be due only when and if the asset is sold. See Stock market cycles and Market timing. Market timing can cause poor performance.

Return-Chasing Behavior

At the Federal Reserve Bank of St. Louis, YiLi Chien, Senior Economist wrote about return-chasing behavior. The average equity

mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...

investor tends to buy them with high past returns and sell otherwise. Buying mutual funds with high returns is called a “return-chasing behavior.” Equity mutual fund flows have a positive correlation with past performance, with a return-flow correlation coefficient of 0.49. Stock market returns are almost unpredictable in the short term. Stock market returns tend to go back to the long-term average. The tendency to buy mutual funds with high returns and sell those with low returns can reduce profit.copied from the wikipedia article Market timing

References

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