Buy and hold is a strategy in which investors simply sit out price drops. This investment concept can only be beaten with a good dose of luck. But if you lose your nerve halfway through, you usually get left behind. An investor purchases shares or other securities with the aim of holding them for the long term. The attempt to buy stofcks at lows and sell at highs is deliberately not made. Doing nothing, no matter what happens in the markets, is the recipe for success. But is it really that simple? Will investors actually get rich with this strategy, as Kostolany is supposed to have promised? In any case, his description of buy and hold is rather vague. Should investors just buy some stocks ? And what exactly does “after many years” mean? They generally make informed decisions when it comes to buying and selling shares, guided by the latest news and dubious predictions from banks and purported stock market analysts.
Buy and Hold beats almost all active mixed funds
How detrimental market timing is for returns can be seen in the performance of actively managed mixed funds . With these funds, managers move assets between stocks and safe bonds within certain limits. They are only too happy to believe the vendors’ promise that the managers will react correctly depending on the market situation and adjust the portfolio accordingly. In the event of a stock market crash , it is believed, the fund manager will switch to safe bonds or cash in good time and buy more shares at the start of a new upswing.
Buy and Hold Tax Benefits
High costs also burden private investors who manage their portfolios themselves and who frequently switch over. Banks, stock exchanges and traders collect money with every transaction – a factor that should not be underestimated, even if the deposit is held with, the cheapest online broker. However, tax disadvantages are even more serious in the long term. Anyone who sells shares that have made price gains in the past pays flat-rate withholding tax on the income . This reduces the amount of money an investor can later put back into the stock market. In the long run, frequent buying and selling leads to lower returns compared to buy and hold simply because of the tax disadvantages. In contrast to active investors, buy-and-hold investors benefit from a tax deferral.
Buy and Hold: Always invested on the best trading days
Ultimately, however, it is above all missed profits that depress returns when market timing attempts fail. On the international stock exchanges, the big profits that pull long-term average returns up are achieved in just a few days. If an investor is not invested at this point in time, the return will be considerably lower. Often times, these super days occur shortly after a brief crash when the market is turning. So when many investors have just sold. The following graphic shows how great the effect of individual trading days can be on the overall investment result.
Buy and hold versus trend following strategies
If investors systematically avoid price falls, they would usually not be invested on both the best and the worst trading days. The bottom line is that this leads to a higher return compared to buy and hold. In fact, investors who follow certain trading strategies in a disciplined manner, such as a trend following strategy based on moving averages, can systematically bypass major price falls. In the upswing, however, these strategies perform significantly worse than buy and hold. So it depends on the future development of the stock market whether a trend following strategy will be more successful than buy and hold. If there are no major stock market crashes during the investment period, a trend following strategy has no chance against buy and hold.
Buy and hold with ETF
Since there is no surefire way to find the few securities that will outperform in the future, merely purchasing the whole market makes sense. With index funds and exchange-traded index funds (ETF), every private investor can now do this with a few clicks of the mouse via an online bank. Many independent financial advisors who work on a fee basis advise their clients to buy and hold with equity ETFs. Your most important argument: For more than 100 years, stocks have on average been the most profitable asset class. Despite all the wars, catastrophes and crises that sometimes led to severe stock market crashes, the world stock market kept climbing new highs.
When to ditch a buy-and-hold strategy
No rule, no exceptions. Investors should consistently follow a strategy, but not leave common sense and intuition in the cloakroom. The results of decades of financial market research suggest that buy and hold with ETFs is the most promising, especially for private investors, despite all the risks. Attempts to dampen market fluctuations with market timing strategies usually cost returns.
Nevertheless, there are market phases in which it would be negligent to turn a blind eye to the data and stoically stick to a buy-and-hold strategy. The late 1990s was such a period. Any reasonably experienced investor could see that the stock markets around the world were hopelessly overvalued, for example when measured by the price / earnings ratio.