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 a ...

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 a ...

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,

emotion Emotions are mental states brought on by neurophysiology, neurophysiological changes, variously associated with thoughts, feelings, behavioral responses, and a degree of pleasure or suffering, displeasure. There is currently no scientific ...

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 ce ...

. 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 Market timing is the strategy of making buying or selling decisions of financial assets (often stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Busi ...

(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 Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...

, Jack Bogle,

Burton Malkiel Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer most noted for his classic finance book '' A Random Walk Down Wall Street'' (first published 1973, in its 12th edition as of 2019). He is a leading proponent of the ...

John Templeton Sir John Marks Templeton (29 November 1912 – 8 July 2008) was an American-born British investor, banker, Asset management, fund manager, and philanthropist. In 1954, he entered the Mutual fund, mutual fund market and created the Franklin Temp ...

, Peter Lynch, and Benjamin Graham since, in the long run, there is a high correlation between the stock market and

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

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 bas ...

(EMH), if every

security Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and socia ...

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 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 is the strategy of making buying or selling decisions of financial assets (often stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Busi ...

. 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 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

References

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