Stock market investment: Is buy and hold strategy right for everyone — explained
Warren Buffett, one of the most successful investors of all time, praised the buy-and-hold strategy as ideal for individuals seeking long-term returns
The buy and hold strategy involves purchasing stocks (or other types of securities such as ETFs) and holding them for several years or even decades regardless of fluctuations in the market. Warren Buffett, one of the most successful investors of all time, praised the buy-and-hold strategy as ideal for individuals seeking long-term returns.
By holding onto stocks for a long time, investors can benefit from the market's overall upward trend and avoid making wrong decisions based on short term market volatility, said Kashvi Jindal, Founder of Invest The Change.
“Recent studies by SEBI and Ministry of Finance have shown that almost 90% of traders lost money in Indian markets in the last 2 years, and trading has only enriched brokers by paying them huge broking fees,” added Kashvi Jindal.
Investors should consider using ETFs or Index funds
However, when it comes to implementing the buy and hold strategy, investors should consider using ETFs or Index funds rather than individual stocks. “Picking individual stocks requires a specialized skill set that most retail investors do not possess, and studies have shown that even professional fund managers struggle to consistently beat benchmark indices once transaction and advisory costs are taken into account. ETFs, on the other hand, provide a low cost diversified exposure to equity markets, which can help reduce risk and increase potential returns. This can lead to higher returns and long term wealth generation,” said Kashvi Jindal.
Despite the fact that many investors have found success with the buy-and-hold approach, it has drawbacks of its own.
Vinit Khandare, CEO and Founder, MyFundBazaar listed 5 drawbacks of buy and hold strategy
Inability To Adapt To Changes In The Market
Maintaining a stock portfolio in the face of ongoing market fluctuations could produce disappointing outcomes. Several industries perform poorly and markets decline while the economy is struggling. Holding onto investments without taking into account market volatility can result in severe losses, therefore investors should be prepared to react swiftly to realign their portfolios during such times.
A Commitment To Efficient Market Hypothesis
The buy-and-hold approach is also criticised for assuming that the stock market will increase in value over the long term. While this may be true over long stretches of time, the market occasionally encounters sharp drops.
The Risk Of A Damaged Portfolio
Industries and markets never operate consistently. Some equities increase exceptionally quickly, while others could advance slowly. By using the buy-and-hold strategy, an investor may be tempted to keep adding shares of stocks that appear to be performing well, regardless of the actual market performance or diversification. Investors increase their likelihood of losing money if those equities start to perform poorly, as they will eventually.
Anticipated Gains Could Take Years To Materialize
Profits from the buy-and-hold approach must be generated over the long term through investments. Like with any investment, Buy and Hold can only produce significant profits with time in the market. The anticipated gains could however take years to materialize, and there is a danger that an investor will require their money back before the portfolio has reached its full potential.
Need Of In-Depth Knowledge & Experience
The buy and hold approach assumes that investors will choose wisely. They need in-depth knowledge of market trends, industry conditions, stock prices, and the dependability of the chosen stock. If you don't have the necessary experience or knowledge, this method could cost you a lot of money.
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