Buy and hold

From Wikipedia, the free encyclopedia

Buy and hold is a long term investment strategy based on the concept that in the long run financial markets give a good rate of return despite periods of volatility or decline. This viewpoint also holds that market timing, i.e. the concept that one can enter the market on the lows and sell on the highs, does not work or does not work for small investors so it is better to simply buy and hold.

The antithesis of buy and hold is the concept of day trading in which money can be made in the short term if an individual tries to short on the peaks, and buy on the lows with greater money coming with greater volatility.

One of the strongest arguments for the buy and hold strategy is 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 [1].

Basically there are two ways in which you can make money utilizing the Buy and Hold strategy, namely:

Over time property prices and rental values gain monetary value due to inflation. That is they become worth more - more expensive;
Over time your mortgage and its repayment lose monetary value due to inflation. That is they are getting cheaper. ^[1]

Others have advocated buy and hold on purely cost-based grounds, without resort to the EMH. Costs such as brokerage and bid/offer spread are incurred on all transactions, and buy-and-hold involves the fewest transactions, all other things being equal^[2]. Warren Buffett is an example of a buy and hold advocate who does not accept the EMH.