Buy and hold, also called position trading, is an
investment strategy whereby an investor buys
financial asset
A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such ...
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,
emotions, and must understand their propensity to
risk aversion. 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 effects such as
Sell in May.
Buy and hold is an example of
passive management. It has been recommended by
Warren Buffett,
Jack Bogle,
Burton Malkiel,
John Templeton,
Peter Lynch, and
Benjamin Graham since, in the long run, there is a high correlation between the stock market and
economic growth.
Efficient-market hypothesis
According to the
efficient-market hypothesis (EMH), if every
security 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,
Warren Buffett is an example of a buy and hold advocate who has rejected the EMH in his
writings
Writing is a medium of human communication which involves the representation of a language through a system of physically inscribed, mechanically transferred, or digitally represented symbols.
Writing systems do not themselves constitute ...
, 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
commissions 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
The Federal Reserve Bank of St. Louis is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., make up the United States' central bank. Missouri is the only state to have two main Federal Reserve Banks (Ka ...
, YiLi Chien, Senior Economist wrote about return-chasing behavior. The average equity mutual fund investor tends to buy MUTUAL FUNDS 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
{{stock market
Investment