Benefits and Drawbacks of Buy-and-Hold Trading

Benefits and Drawbacks of Buy-and-Hold Trading

For long-term investments, time spent in buy and hold trading is much less compared to time spent on medium- and short-term investments. Very long-term investment is not time-sensitive, while in shorter-term investment, you have to take timely action.

See Also: Short-Term vs. Long-Term Investment: The Difference

Many buy and hold traders believe the best way to have exposure to the stock market is to buy great companies and hold them through any market condition. When they buy stocks with the intention of holding them for years, they are more likely to steer clear of trendy companies or up-and-coming, high-risk businesses.

Being a passive, long-term investor has many benefits, as well as drawbacks over other types of trading.

Benefits of Buy and Hold Trading

  • Fewer fees and commissions

Fees are often overlooked by traders. But when trading with small amounts of money, fees and commissions become even more important. Learning to control instinctive trading and doing far less portfolio management may be the most profitable move a trader can make. Many believe that the big money in investing is made by diligent, long-term traders – buy and hold traders.

  • Low Maintenance

Buy and hold traders are not required to spend a lot of time keeping track of the stock market daily movements. The practice of watching daily price movements is highly counterproductive to the character a long-term investor must keep.

  • Less Nerve-Wracking

Companies that are typically chosen for buy and hold portfolios are less volatile than the average stock. Due to the lower volatility, there is less chance that a stock in a buy and hold trader’s portfolio will suddenly gap-up or gap-down overnight.

See Also: Ways to Divide to Your Portfolio Between Stocks and Bonds

  • Bonus for dividend growth investors

If they are dividend growth investors, there is an extra bonus to being a buy and hold investor. As the dividend rate continues to rise, their yield on cost will increase as well.

  • Tax Benefits 

One reason many traders prefer to buy and hold investments is that they defer capital gains taxes while the investment keeps earning additional money. It is actually enabling them to make money from the money they would have owed in taxes, which further increases their earnings over time.

See Also: Types of Taxes

Drawbacks of Buy and Hold Trading

  • Risk

The buy and hold strategy may give the appearance of a safer investment model, but no strategy is above risk.

  • Bear markets

The other buy and hold problem is the start of bear markets. If a buy and hold trader purchases a stock prior to a swift market decline similar to the ones in 1987 and 2002 and again in 2008, the traders may have to wait five to 10 years to break even on their initial investment. A buy and hold trader may be required to take on more fundamental analysis before making an investment decision.

  • Price Swings

A buy and hold trader will not be able to benefit from the price swings when holding the shares for long periods of time, whereas in shorter-term investment – as with swing trading – the buy and hold trader can catch most of the swings. The sum of the price swings will be several times more than the total movement of the price.

See Also: Learn Swing Trading

  • Buy and Hold Itself

One commonly overlooked problem for the buy and hold traders is the fact they have to buy and hold. Making money in the market is not like working a job wherein more effort equals greater results. So, traders will have to fight the urge to overtrade, as the key to a successful buy and hold strategy is quality, not quantity.

Conclusion

Buy and hold trading is simply another method of investing and earning in the stock market – the long-term investment strategy. For a small investor who does not care to analyze the market, does not know to shift sectors, cannot buy on the lows and sell on the highs, it is better to buy blue chip or budding blue chip company stocks, with a good spread, and hold them for a long period of time.

See Also: Checking On Your Trading Goals

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