Buy and Hold Investment Strategy
“Buy and Hold” is not a clear name for a brilliant investment strategy, especially when you are concerned about the safety of your money. However, historical data suggest that the strategy of buying and maintaining shares has established itself as quite successful. Long-term investment strategies are usually designed for decades, and this strategy is based on what you have in stock for quite some time. It often happens that market fluctuations, a bearish trend, inflation and a general economic downturn lead to a sharp decrease in the value of the portfolio during the first 2-5 years.
When you use this strategy, you should consider that there will be, and even should be, periods when you lose your money. And yet, in the long run, this is the way when you can receive an average of about 10% of the initial investment per year with minimal, or acceptable, risks. Of course, this percentage applies to standard portfolios, such as those offered by pension funds or insurance companies.
Traditional stock portfolio for buy and hold strategy
A compatible fund is a typical investment tool that is used not only by pension funds, insurance companies, but also ordinary investors. It helps create wealth over time with minimal risk. A typical compatible fund uses risk mitigation through portfolio diversification with stocks and bonds. Naturally, the percentage of return on such a portfolio for a certain period of time will depend on its components and the distribution of funds between them. When choosing a compatible (mutual) fund, it is necessary to take into account the specific needs and financial capabilities of the investor. The “traditional” portfolio for the “buy and hold” strategy, as a rule, contains 60% of shares and 40% of bonds, or “60/40 portfolio”.
Portfolio 60/40 is designed for long-term investments with minimal risks, and has been proven for decades. Shares in such a traditional portfolio tend to grow and, accordingly, potential capital gains in the future. If dividends are paid on shares, then in addition to the growth of the main invested amount, the investor will have a steady stream of income.
Bonds in a traditional portfolio provide reliable income, and complement the overall portfolio return. As a rule, they have much lower risks, and are responsible for the stability of the portfolio, generating income in the form of interest payments. Of course, bond yields can be predicted accurately and consistently, but they do not provide the growth opportunity that stocks can provide. Beginner investors tend to include more stocks in the portfolio in order to have greater potential for portfolio growth. Investors, whose portfolio already has a significant value, or is preparing to sell, prefer a portfolio with more bonds and less risk.
The traditional 60/40 portfolio, although it provides an average return of 10% per year, is not an ideal proportion for your portfolio or your financial needs.
The best way to increase the profitability of the buy and hold strategy is to optimize the strategy. For example, a change in the share of stocks and bonds in a portfolio, depending on various factors. They can be: the age of the investor, his financial situation, etc. To get a big return on their money, they carefully select the composition of the shares. In order to learn how to choose the right shares, you should understand the difference between growth and the value of shares.
When you think about stock growth, mean young companies that have gained some market position and are ready to generate even greater returns in the future. Google, Apple are examples of stocks of good companies. Such companies are distinguished by sales growth, solid profits, and a leading role in their market sector. These companies, as a rule, have leading positions in the S&P 500 index.
Value and value of shares
The value of a stock is its monetary value. In reality, the action costs so much because the company is in good condition, but is not taking any steps now that will make it much better in the foreseeable future. Thus, the stock price may now be quite low, but it is very possible that in the not so distant future they will face a serious leap. For example, the most common reason for low prices is poor company management, which in some cases can be easily fixed. New competitors may temporarily squeeze a company out on the market, but this may only be a temporary occurrence. For example, such changes have recently occurred with shares of Coca-Cola and Hewlett-Packard.
The value and growth of stocks are very important factors in the buy and hold strategy. In the long run, stock prices are traditionally ahead of their growth. However, investing only in growing stocks is undesirable. Usually, half of the funds intended for investing in stocks are directed to growing stocks.