Buy and hold

Buy and hold, also called position trading, is an investment strategy whereby an investor buys financial assets or non-financial assets such as real estate, to hold them long term, with the goal of realizing price appreciation, despite volatility.^[1]

This approach implies confidence that the value of the investments will be higher in the future. Investors must not be affected by recency bias, emotions, and must understand their propensity to risk aversion. Investors must buy financial instruments that they expect to appreciate in the long term. Buy and hold investors do not sell after a decline in value. They do not engage in market timing (i.e. selling a security with the goal of buying it again at a lower price) and do not believe in calendar effects such as Sell in May.^[2]

Buy and hold is an example of passive management.^[3] It has been recommended by Warren Buffett, Jack Bogle, Burton Malkiel, John Templeton, Peter Lynch, and Benjamin Graham since, in the long run, there is a high correlation between the stock market and economic growth.^[4]^[5]

Efficient-market hypothesis

According to 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.^[6] However, Warren Buffett is an example of a buy and hold advocate who has rejected the EMH in his writings, and has built his fortune by investing in companies when they were undervalued.

Lower costs

Others have advocated buy-and-hold on purely cost-based grounds. Costs such as commissions are incurred on all transactions, and the buy and hold strategy involves the fewest transactions for a constant amount invested, all other things being equal. Taxation law also has some effect; long-term capital gain taxes may be lower than those incurred from short term trading, and tax may be due only when and if the asset is sold.^[5]

See Stock market cycles and Market timing. Market timing can cause poor performance.^[7]

Return-Chasing Behavior

At the Federal Reserve Bank of St. Louis, YiLi Chien, Senior Economist wrote about return-chasing behavior. The average equity mutual fund investor tends to buy them with high past returns and sell otherwise. Buying mutual funds with high returns is called a “return-chasing behavior.” Equity mutual fund flows have a positive correlation with past performance, with a return-flow correlation coefficient of 0.49. Stock market returns are almost unpredictable in the short term. Stock market returns tend to go back to the long-term average. The tendency to buy mutual funds with high returns and sell those with low returns can reduce profit.^[8]

References

^ BEERS, BRIAN (May 13, 2020). "Buy And Hold Definition". Investopedia.
^ Lake, Rebecca (June 19, 2019). "8 Mistakes That Can Wreck Your Buy-and-Hold Strategy". U.S. News & World Report.
^ Malkiel, Burton G. (January 5, 2015). A Random Walk Down Wall Street. W. W. Norton. ISBN 9780393248951.ISBN 0-393-03888-2
^ Elkins, Kathleen (September 18, 2018). "Warren Buffett and Jack Bogle agree on the formula for long-term success: 'Buy and hold'". CNBC.
^ ^a ^b TUN, ZAW THIHA (August 22, 2019). "Pros & Cons Of A Passive Buy And Hold Strategy". Investopedia.
^ Meadows, Richard (May 14, 2020). "Kindly Stop Saying The Efficient Market Hypothesis is Dead". Deep Dish.
^ copied from wikipedia article Market timing Metcalfe, Guy (July 18, 2018). "The mathematics of market timing". PLOS ONE. 13 (7): e0200561. arXiv:1712.05031. Bibcode:2018PLoSO..1300561M. doi:10.1371/journal.pone.0200561. PMC 6051602. PMID 30021021.
^ copied from the wikipedia article Market timing "Chasing Returns Has a High Cost for Investors | St. Louis Fed On the Economy". Archived from the original on December 27, 2014. Retrieved October 15, 2020.

v t e Financial markets
Types of markets	Primary market Secondary market Third market Fourth market
Types of stocks	Common stock Golden share Preferred stock Restricted stock Tracking stock
Share capital	Authorised capital Issued shares Shares outstanding Treasury stock
Participants	Broker Floor broker Inter-dealer broker Broker-dealer Market maker Trader Floor trader Proprietary trader Quantitative analyst Investor Hedger Speculator Arbitrager Scalper Regulator
Trading venues	Exchange List of stock exchanges Trading hours Over-the-counter (off-exchange) Alternative trading system (ATS) Multilateral trading facility (MTF) Electronic communication network (ECN) Direct market access (DMA) Straight-through processing (STP) Dark pool (private exchange) Crossing network Liquidity aggregator
Stock valuation	Alpha Arbitrage pricing theory (APT) Beta Buffett indicator (Cap-to-GDP) Book value (BV) Capital asset pricing model (CAPM) Capital market line (CML) Dividend discount model (DDM) Dividend yield Earnings yield EV/EBITDA Fed model Net asset value (NAV) Security characteristic line Security market line (SML) T-model
Trading theories and strategies	Algorithmic trading Buy and hold Contrarian investing Dollar cost averaging Efficient-market hypothesis (EMH) Fundamental analysis Growth stock Market timing Modern portfolio theory (MPT) Momentum investing Mosaic theory Pairs trade Post-modern portfolio theory (PMPT) Random walk hypothesis (RMH) Sector rotation Style investing Swing trading Technical analysis Trend following Value averaging Value investing
Related terms	Bid–ask spread Block trade Cross listing Dividend Dual-listed company DuPont analysis Efficient frontier Financial law Flight-to-quality Government bond Greenspan put Haircut Initial public offering (IPO) Long Mandatory offer Margin Market anomaly Market capitalization Market depth Market manipulation Market trend Mean reversion Momentum Open outcry Order book Position Public float Public offering Rally Returns-based style analysis Reverse stock split Share repurchase Short selling Short squeeze Slippage Speculation Squeeze-out Stock dilution Stock exchange Stock market index Stock split Stock swap Trade Tender offer Uptick rule Volatility Voting interest Yield

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