The “buy and hold” or buy and hold strategy is one of the most popular in the stock market. It is used by those who do not want to actively trade on the stock exchange and make risky transactions in pursuit of high profits. Investors who follow this strategy invest in the long term because they believe in the constant growth of the economy.
Content:
The essence of the “buy and hold” strategy
The main principle of the strategy is to hold shares for a long time: 5 years or more. Such an investment horizon is based on the fact that in the long run the market always grows, overcoming even strong crises or recessions.
Look at the dynamics of the Russian and American markets. The chart shows that both were recovering from falls, and then updated all-time highs.
The reason is the desire of the business to develop and increase profits. Each company is trying to cover new markets, expand production, develop technologies – this pushes the entire economy up and makes it grow regularly.
This strategy is also used by the legendary investor Warren Buffett. For example, for more than 30 years he has held Coca-Cola papers in his portfolio. “We aim to own the business forever,” says the investor.
“If you buy a business wisely, then it will bring you money. You have to buy a business so that you don’t sell it for the next five years – as if the stock exchange closed and you couldn’t get a quote on the shares you bought. You should be happy that you own this business,” Buffett advises.
How much can you earn
Theoretically, the annual profitability with such a strategy should be no less than the market average. In the US, this is about 13% per annum over the past 10 years, in Russia – 10.8%. However, a lot depends on the choice of assets and how you will manage your investment portfolio.
How to use the strategy correctly
It is not enough to simply buy shares and forget about them. You need to choose reliable companies that will survive market shocks, and then distribute investments, review the composition of the portfolio and regularly buy additional assets.
Take a Look at the Blue Chips
These are the largest and most stable players on the stock exchange. An example of Russian and foreign “blue chips”: Gazprom, Sberbank, Lukoil, Apple, McDonald’s, Microsoft. These companies have a high market capitalization, which means they can survive the bad times. Their business is so large and established that it is unlikely to go bankrupt.
They also always pay dividends. Therefore, investors do not have to sell shares in order to earn. It is enough to own securities and receive payments to the brokerage account at the appointed time.
At the same time, you should not invest in companies with too high dividends. This is not always a good sign. If the organization allocates a lot for the payment, then it may not invest enough in its development.
Companies with low dividends can also be unprofitable for investments. Try to choose those whose dividend yield will be higher than the bank deposit and the inflation rate. Otherwise, it is easier to take the savings to the bank, and not look for the right options in the stock market.
Try using ETFs
Another tool that is suitable for beginners – ETFs. They completely duplicate the profitability of the entire market of a particular country or industry. Management companies combine several companies into funds so that their dynamics follow the economy.
When you buy one ETF share, you immediately invest in several companies. For example, US corporate ETFs include shares of Apple, Amazon, Google, Tesla, and others. If the US securities market goes up, then this ETF will go up too.
The disadvantage of ETFs is that they do not transfer dividends. Therefore, you can earn only on the difference between the purchase and sale prices.
Conduct fundamental analysis and look for undervalued companies
Even if you have chosen blue chips, try to make a fundamental assessment of them. This will help to understand the prospects of the business and earn not only on dividends, but also on the growth of securities prices.
Classical fundamental analysis has several methods. Each investor does it differently. You need to start with an assessment of the state of the economy, then go down to an assessment of a particular industry, and only then to an analysis of the company and its shares.
It is difficult for a beginner to carry out such an analysis, but everything can be simplified by focusing on multipliers. One of them is P/E, which shows the payback time of the company’s business. For example, Gazprom’s P/E is 4.09, which means that when buying all of Gazprom, the return on investment will be a little more than 4 years.
The multiplier should be compared to its industry average. If it is below average, the company is undervalued and has growth potential. If it is higher, on the contrary, investors overestimate it. The P/E of the entire oil and gas industry is currently 6.8.
Another factor is an estimate of revenue, net profit and debt load for 5-10 years. Avoid companies with falling revenue and growing debt.
Diversify
Diversification is when an investor spreads money across different companies and industries. It is considered a basic rule for risk protection. The portfolio should contain at least 10-12 companies from 3-4 sectors.
Portfolio Example:
- Oil and gas production – Gazprom, Lukoil, Surgutneftegaz.
- Metallurgy – NLMK, Norilsk Nickel, Polymetal.
- Consumer sector – Magnit, Detsky Mir, X5 Retail Group.
- Telecommunications and IT – MTS, Rostelecom.
- Finance – Sberbank, VTB.
A wide portfolio protects against downside risks in individual industries. But it is not necessary to distribute funds only among Russian organizations. You can add US, German, Chinese or Japanese stocks to your portfolio. Then investments will be protected not only from industry risks, but also from negative scenarios that may affect the economy of the entire country.
So, one of the bad examples is the Japanese stock market. In 1989, it renewed its peak, but due to the financial bubble in the real estate market and the country’s banking policy, it collapsed by 45% and gradually fell, reaching a bottom in 2009.
The market has not been able to update the historical maximum so far. Therefore, if you invested a large amount of money in Japanese stocks at their peak and did not distribute investments among other companies, you most likely would not be able to win back the loss.
Invest Regularly
Not all beginners have the budget to put together a full portfolio. The way out of this situation is to allocate part of the money for the purchase of assets every month and build the portfolio gradually. Invest 20-25% of your core income, and invest the first dividends you receive back into stocks to reach your desired return faster.
It also allows you to average the entry price and reduce the impact of stock price volatility. It is easier for beginners to invest this way psychologically. No need to wait for the right moment and assess the state of the market. You simply buy assets in a disciplined manner at the same time for the same amounts.
Example 1: you have 60,000, for which you immediately bought 60 shares worth 1,000 rubles apiece. But a month later, the share price fell to 800 rubles, and you received a loss of 12,000. A month later, the papers rose to 900, you won back a little, but still remained in the red by 6,000. In total, you have 60 shares of 900 rubles each , and the value of the portfolio is 54,000.
Example 2: you decided not to invest all the money at once, but to invest in equal parts in the same shares. In the first month, they invested 20,000 thousand in 20 shares of 1,000 rubles each. The second month, another 20,000 in 25 shares of 800 rubles each. The third month – we bought 22 securities at 900. In total – you have 67 shares at 900 rubles, and the total portfolio is 60,300.
Keep your emotions under control
New investors can often feel anxious, uncertain, or impatient. All this is characteristic of the brain and sometimes helps to keep the situation under control, reacting in time to the market situation.
But emotions can also interfere strongly and push us to the wrong decisions. For example, when the market falls, many panic, rush to sell assets in order to save at least something.
An investor who has chosen a “buy and hold” strategy should try to follow it despite crises. Give your assets time to recover. Remember that a drawdown is a good opportunity to buy securities at a discount. Markets will always rise and fall.
Pros and Cons of a Buy and Hold Strategy
Advantages:
- This is a passive strategy that does not need to be spent a lot of time, unlike active trading.
- Opportunity to receive additional income through dividends.
- Low risks and positive returns due to the long investment horizon.
- You do not need to pay taxes on income if you have owned securities for more than three years.
- Suitable for beginners and guarantees earnings subject to simple recommendations and rules.
- When using this approach, stocks of the largest and stable companies that are resistant to crises are usually chosen for the portfolio.
Disadvantages:
- Money must be kept in assets for a long time and not used for personal expenses.
- There are risks of incorrect assessment of companies at the initial stages of selection.
- You need to be patient if stocks fall in price during market drawdowns.
- You can’t completely let go of the situation and stop monitoring the portfolio.
- It’s hard to beat the market average, especially if you’ve chosen ETFs as your instrument.
- It is necessary to regularly replenish capital and maintain discipline.
Read: What stocks should a beginner investor buy?
