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 Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

, 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 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 dismissed to ...

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 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 Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...

(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 any market anomaly, different behaviour of stock markets, or economic effect which appears to be related to the calendar, such as the day of the week, time of the month, time of the year, time within the ...

s such as

Sell in May Sell in May and go away is an investment strategy for stocks based on a theory (sometimes known as the Halloween indicator) that the period from November to April inclusive has significantly stronger stock market growth on average than the other m ...

. 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 becoming ...

. 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 e ...

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 Peter Lynch (born January 19, 1944) is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more th ...

, 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 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" \n\n\nsecurity.txt is a proposed standard for websites' security information that is meant to allow security researchers to easily report security vulnerabilities. The standard prescribes a text file called \"security.txt\" in the well known locat ...

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 tax A capital gains tax (CGT) is the tax on profits realized on the sale of a non-inventory asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property. Not all countries impose a c ...

es 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 ''See Business Cycle.'' Stock market cycles are proposed patterns that proponents argue may exist in stock markets. Many such cycles have been proposed, such as tying stock market changes to political leadership, or fluctuations in commodity pr ...

and

Market timing Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...

. 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

References

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