Buy and Hold (Investing Strategy) Definition
Buy and hold refers to a passive investment strategy where the investor tends to buy stocks and hold them for a long time irrespective of the market fluctuations. The person who is ready to invest in buy and hold investment strategy has nothing to do with anything that is covered in short-run (price fluctuations, technical factors, etc.). Even affluent investors like Warren Buffet consider buy and hold approach favorable for investors who look for big returns in the long-run.
- Buy and hold strategy refers to a passive investment strategy where the investor can buy a security and hold it for a long period of time irrespective of market fluctuations occurring in the short-run.
- Under buy and hold strategy, one can receive tax advantages by deferring taxes on capital gains on investments made in the long-run by holding instead of selling.
- As per the critics, buy and hold investors compromise with gains by successfully handling the volatile markets, instead of locking in profits.
A Little More on What is Buy and Hold Investment Strategy
Shareholders who understand that it takes a significant amount of time for change to take place, follow buy and hold approach. Instead of considering ownership as a short-term thing, such investors tend to hold stocks and shares in two types of markets: bull and bear. Therefore, equity stakeholders take the responsibility of either incurring losses or receiving amazing returns.
Benefits of Buy and Hold Investing
As per the traditional approach of investing, equity offers more returns as compared to any other class of assets including bonds. However, experts debate till date if buy and hold strategy yields more returns than active investing strategy. Considering the tax aspects, buy and hold strategy offers tax advantage to investors, and they receive exemptions on the capital gains earned for long-term investments.
When you buy shares of a company, you get its ownership. The benefits that come along with ownership involve voting rights, and having a share in the company’s profits as it progresses. Shareholders get the ultimate power of decision making, and their quantum of votes is equivalent to the amount of shares they own. They get the authority to make decisions for crucial issues including mergers and acquisitions, voting for directors and CEO of the company, and a lot more. Activist investors who have specific holdings can influence the management of the company, and can aim to get recognition on the board of directors.
Active Versus Passive Management
There are two styles of management: active and passive, and the debate over which style is better is ongoing. An investor who prefers buy and hold strategy prefers a passive management style.
With rebalancing of indices and increase in weighting with respect to market capitalization, turnover rates tend to be very low because managers invest their energies in resolving issues in the wider market. One can hold stocks until they are a part of indices.
Real World Example of Buy and Hold
One of the best examples for understanding the concept of buy and hold strategy will be the purchase of Apple stock. If an investor invested in 100 shares of Apple at $18 per share in 2008, and held it till 2019 when the stock price rose to $157, he/she would have got a return of around 900% in a time period of 10 years.
Critics say that people who invest in long-run investment strategy cannot understand the market timing. Short-term investment strategies have proved to work for many experts, but the risks associated with them are more. To be successful in making a right investment decision, you need to be loyal and committed to the company’s ownership, and should not prefer leaving the selected place.
Reference for “Buy and Hold”
- https://www.thebalance.com › Investing › Mutual Funds › Managing a Portfoli
Performance evaluation of hedge funds with option-based and buy-and-hold strategies, Agarwal, V., & Naik, N. Y. (2000). Performance evaluation of hedge funds with option-based and buy-and-hold strategies. Since hedge fund returns exhibit non-linear option-like exposures to standard asset classes (Fung and Hsieh (1997a, 2000a)), traditional linear factor models offer limited help in evaluating the performance of hedge funds. We propose a general asset class factor model comprising of excess returns on passive option-based strategies and on buy-and-hold strategies to benchmark the performance of hedge funds. Our model is a generalized version of Glosten and Jagannathan (1994) and it explicitly accounts for non-linear nature of payoffs displayed by hedge funds. Although in practice hedge funds can follow a myriad of dynamic trading strategies, we find that a few simple option writing/buying strategies are able to explain a significant proportion of variation in the hedge fund returns over time. In general, we find that hedge fund strategies added significant value (in excess of estimated survivorship bias) in the early nineties but less so in the late nineties. We also find that aggregated across all funds in our sample, hedge funds that do not use leverage show, on average, larger alphas and better information ratios compared to the funds that use leverage, across different time periods.
Thou shalt buy and hold, Shiryaev, A., Xu¶, Z., & Zhou, X. Y. (2008). Thou shalt buy and hold. Quantitative finance, 8(8), 765-776. An investor holding a stock needs to decide when to sell it over a given investment horizon. It is tempting to think that she should sell at the maximum price over the entire horizon, which is however impossible to achieve. A close yet realistic goal is to sell the stock at a time when the expected relative error between the selling price and the aforementioned maximum price is minimized. This problem is investigated for a Black–Scholes market. A stock ‘goodness index’ α, defined to be the ratio between the excess return rate and the squared volatility rate, is employed to measure the quality of the stock. It is shown that when the stock is good enough, or to be precise when α ≥ 1/2, the optimal strategy is to hold on to the stock, selling only at the end of the horizon. Moreover, the resulting expected relative error diminishes to zero when α goes to infinity. On the other hand, one should sell the stock immediately if α ≤ 0. These results justify the widely accepted financial wisdom that one should buy and hold a stock – if it is good, that is.
GP-evolved technical trading rules can outperform buy and hold, Becker, L. A., & Seshadri, M. (2003). GP-evolved technical trading rules can outperform buy and hold. This paper presents a number of experiments in which GP-evolved technical trading rules outperform a buy-and-hold strategy on the S&P500, even taking into account transaction costs. Several methodology changes from previous work are discussed and tested. These include a complexity-penalizing factor, a fitness function that considers consistency of performance, and coevolution of a separate buy and sell rule.
Market timing: Better than a buy–and–hold strategy, Shilling, A. G. (1992). Market timing: Better than a buy-and-hold strategy. Financial Analysts Journal, 48(2), 46-50.
On a stochastic version of the trading rule “buy and hold”, Shiryaev, A., & Novikov, A. A. (2009). On a stochastic version of the trading rule “buy and hold”. Statistics & Decisions International mathematical journal for stochastic methods and models, 26(4), 289-302. The paper deals with the problem of finding an optimal one-time rebalancing strategy assuming that in the Black–Scholes model the drift term of the stock may change its value spontaneously at some random non-observable (hidden) time. The problem is studied on a finite time interval under two criteria of optimality (logarithmic and linear). The methods of the paper are based on the results for the quickest detection of drift change for Brownian motion.
Optimal time to sell a stock in the Black–Scholes model: comment on ‘Thou Shalt Buy and Hold‘, by A. Shiryaev, Z. Xu and XY Zhou, Majumdar, S. N., & Bouchaud, J. P. (2008). Optimal time to sell a stock in the Black–Scholes model: comment on ‘Thou Shalt Buy and Hold’, by A. Shiryaev, Z. Xu and XY Zhou. Quantitative Finance, 8(8), 753-760. We reconsider the problem of the optimal time to sell a stock studied by Shiryaev et al. (2008Shiryaev, A, Xu, Z and Zhou, XY. 2008. Thou shalt buy and hold. Quant. Finan., 8: 765–776.[Taylor & Francis Online], [Web of Science ®], , [Google Scholar]) (following in this issue of Quantitative Finance) using path integral methods. These methods allow us to confirm the results obtained by these authors and extend them to the entire parameter region. We also obtain the full distribution of the time tm at which the maximum of the price is reached for arbitrary values of the drift.