Investment Basics: Buy and Hold: A Good Strategy?
February 21, 2018
By Colin OShea
Consider both the advantages and disadvantages of a buy-and-hold investing strategy.
A bright side of a buy-and-hold investing strategy is that it may help you ride out market volatility and lessen the temptation to time the markets.
A dark side is that it may prevent you from monitoring your investments closely and selling any that repeatedly underperform a benchmark.
There are pros and cons to every investment strategy. So, before you make investment decisions, consider all aspects of your investing approach.
Short-term market fluctuations may be less of a concern when your investing goals are far in the future. A buy-and-hold strategy allows you to monitor your portfolio's performance a few times a year, instead of daily or weekly, to see if your investments are meeting your expectations.
A buy-and-hold strategy may provide tax efficiency when you hold individual stocks in a taxable account as you generally won't realize capital gains unless you sell your investments. You may have capital gain distributions, however, if you invest in mutual funds. And any dividends you receive will be taxable income, although they may qualify for special tax treatment.1
The Risk Factor
One pitfall of a buy-and-hold strategy is that fluctuating market values can change your portfolio's risk exposure by altering your target asset allocation. A change in your asset mix may expose you to more or less risk than you intended. By reviewing your portfolio periodically, you can help ensure that your investments match your risk tolerance.
Buy and hold doesn't mean "set and forget." Remaining locked in your strategy when a stock's performance over time has not met your expectations may result in unrecoverable losses. You might want to consider if selling an underperforming investment may be a good option.