In the world of investments, the concept of “buy and hold” is a risky proposition. You buy an investment, whether stocks, bonds or real estate, and hold onto it for the long term, ignoring fluctuations in the market. The risk in this approach is that, because of the unpredictable life cycle of a business, you’re probably right a lot — until you’re wrong.
The Upsides of “Buy and Hold”
If the stars align and all goes well, you could benefit from this approach. For example, if you had purchased 100 shares of Apple (AAPL) stock at its closing price of $18 per share in January 2008 and held onto the stock until January 2019, the stock climbed to $157 per share. That’s a return of nearly 900 percent in just over 10 years. But Apple is an anomaly. The company has enjoyed steady, continued success over a long period of time.
One benefit of this strategy is that because it involves just one or a couple of transactions, you will pay less in brokerage, advisory fees, and sales commissions. Also, the tax rate on long-term capital gain is lower than that of short-term capital gain.
The overarching downside of “buy and hold” is that it completely ignores the fundamental investment concept of managing risk. Anyone can purchase a stock and then forget about it. But if the value of that stock begins to circle the drain and you do nothing, you’re going to go down with it.
In addition, this approach ignores the mathematically implied optimum holding period for securities based on transaction costs and volatility. If it works out, it’s most likely due to luck, or a fluke.
“Logic will get you from point A to point B. Imagination and hard work will take you everywhere else.”—Albert Einstein
Buying an individual stock and forgetting about it will get you from point A (not owning any stocks) to point B (owning stocks). But it is not an effective strategy for optimizing your outcome.
The markets are constantly in flux, with hundreds of stocks fluctuating in response to many complex economic and political factors.
The average life cycle of a publicly traded company is about 20 years before it gets bought out, goes under or merges with another company. As a company grows and gains market share, it starts using those profits to buy other businesses, sometimes venturing into new market sectors. That approach sometimes leads to success, but more often than not, these companies become so big that it becomes difficult to manage them, and they become less efficient and less profitable. As a result, their success actually leads to their demise.
Now, there are some exceptions. But in my 25-year career, I have seen very few cases in which this passive “buy and hold” approach pay off.
I have many older clients — mostly those among the Great Generation who grew up during the Great Depression and fought in World War II — with stocks they purchased 30 or 40 years ago. They bought the stocks and had stock certificates, which means the stocks were held at the companies. They didn’t receive monthly statements. Maybe they received one statement per year. They just bought it, held onto it and forgot about it.
At some point along the way, I get involved to help these investors, either when they are preparing for retirement or when they die and their adult children ask me to help settle the estate. Sometimes investors come to me when companies whose stocks they own go out of business or a dividend gets cut, and the investors are trying to figure out how they’re going to live off their now-gutted portfolio.
What I tend to find is they have anywhere from five to 20 different holdings. Of those, one or two increased in value, while the rest of them ended up worthless because the companies had gone bankrupt, had gotten bought out or hadn’t grown for decades.
Even if you own what looks like the most valuable stock, you never know what’s going on behind the scenes. You could get a call one day from a rep who tells you, “I’m sorry — we didn’t know the CEO/CFO was cooking the books. The company has filed for bankruptcy.” An individual stock can go up exponentially, but it can also lose all its value.
The problem with individual stocks is before you know there’s a problem, it’s too late to do anything about it.
A Better Strategy
As you can see, “buy and hold” is an incredibly risky proposition. So, what’s a better approach?
Work with your wealth-planning team so they can design a customized financial plan for you, based on your unique situation, needs and goals. Your team will build diversification into your portfolio, taking into consideration factors like your risk tolerance and your time horizon related to retirement. Diversification is the key.
Once your plan is in place, your advisory team will manage your portfolio consistently and appropriately, adjusting it as needed according to what’s happening in the economy, in the markets and in your own situation.
Any opinions are those of Tyson Ray and FORM Wealth Advisors, and not necessarily those of Raymond James.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
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