Warren Buffet once said, apart from many other important statements, that “Our favorite holding period is forever“. No matter the worst times for financial markets, Warren Buffet kept both his nerve and portfolio intact: buying and holding assets for a very long time as the main strategy for his investments.
This strategy, is of course, not perfect and has many risks like anything else that involves the financial market, but it is one of the oldest and most basic strategies out there. The article below will focus on this strategy Warren Buffet spoke of so highly, – buy-and-hold,- guiding you to what it is and how it can be implemented on the eToro platform.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
This strategy is quite simple in its essence: an investor buys certain assets, such as stocks or ETFs, and holds onto them for a relatively long period of time, ignoring any short-term market fluctuations and price movements. Once you intially buy assets in a specific proportion (allocation), you will hold them for a period of time of your choice (but relatively long-term) without any additional rebalancing and ignoring any changes in asset price performance. Where does the gain come from in this strategy then? Well, mainly from the appreciation of assets you hold over time, as well as any divident income they generated in the meanwhile. The exact time will depend on your goals of investing and on the speed with which the asset appreciates in time.
Buy-and-hold is not about fast and big profits and this strategy is certainly not for everyone. It is an investment strategy that aims at building your wealth gradually in the medium or long term, with investors holding onto their assets for months or even years. Whether the stocks you have chosen will indeed increase in price over time depends on the company performance as well as the surrounding market and industry conditions. The value of Apple stock (AAPL) for example has risen from $18 in January 2008 to $143 as of January 2021, and those who invested into it at the right time and held it sufficiently long enough certainly made some noticeable gains. On the other hand, investors that bought Kodak (KODK) in January 2014 and held it for 5 years would have seen a dramatic fall in price from $32 to about $3 per share. Well as you see, it is all about selecting the right asset and holding it for the right amount of time. Because of this problem some investors prefer funds which combine many asssets at once to limit the losses from failure of any single asset in comparison to the overall portfolio while other invest the time and effort to hand pick stocks themselves.
The debate whether active trading or a passive buy-and-hold strategy generate better results compared to each other is an ongoing one. Many investors argue that passive buy-and-hold strategy outperforms active funds in the majority of times, but that depends greatly on your ability to select the right assets for your portfolio.
Assets in the Buy-and-Hold strategy
Most long-term investors focus on stocks as their main asset of interest. Some investors choose stocks individually according to their analysis and outlook, others choose funds like ETFs which combine a variety of assets inside them, offering diversification and a wider exposure to the market. It is also possiblie to diversify your portfolio with the addition of certain commodities, such as precious metals like gold or silver, cryptoassets or other assets to adjust your overall risks and returns to the desired levels. All of these instruments are available on the eToro platform.
Because short-term traders attempt to maximize their returns many times they increase risks of their trades by using leverage and short-selling through CFDs. They attempt to benefit from both increases and decreases in asset prices, profiting from any price movement according to their strategy, protecting their capital using stop-loss and take profit options on the platform. Buy-and-hold investors tend to optimize their long-term risks and ignore short-term price drops they see as temporary.
Because traders focus on quick profits from market volatitilities they employ technical analysis with a variety of trading tools. Investors tend to focus on the long-term intrinsic value of the assets they choose and conduct fundamental analysis instead. Taking stocks as an example, investors could analyze a company’s financial performance, its sales, revenues and costs, change in its profit and profitability indicators overall, as well as its strategy, growth potential in the context of the industry and in comparison to its competitors and so on.
There is quite a lot of information on each asset-issuing company available on the platform which you can access by selecting the asset of your choice. There is a quick introduction on the company on the first page, including its brief history, the industry its operates in and the overall strategy. This section also mentions the kind of factors that affect the stock price most significantly apart from its own performance, in case of Tesla below for example it is the conditions of the oil and gas industry and other macroeconomic risks.
The ‘Stats’ section shows you the financial performance of the 4 latest quarters on its balance sheet, income statement and cash flow statement, an overview of key financial indicators and profitability ratios as well as profile with a description of the industry and an indication of what kind of investors should consider this asset for their portfolio. The chart page finally shows you the price movement of this stock over time.
What are some of the benefits?
This passive investment strategy doesn’t require as much time commitment in monitoring like active trading and you save on time rebalancing and correcting your positions. This strategy is mostly based on fundamental analysis which has much less place guessing when compared to technical analysis: profitability ratio and financial statements are based on objective data and the obly subjective aspect is forecasting growth.
Risks of Buy-and-Hold strategy
Even the most experienced investors are subjected to panic, basing their decisions on emotions or unexpected news. As you hopefully realized this strategy ties up your capital for a long period of time and you need to be ‘ok’ with foregoing any opportunities that come around in the meanwhile. This also means you need to be able to manage your emotions and trading well during turbulent times like panic selling, for example.
Asset and time sensitivity
As you might have seen at the beggining of the article, this strategy is very senstitive to time: there is no guarantee that after 5 years of holding your asset you will generate the returns you were hoping for. You need to select a timeframe which will actually deliver the results you were hoping for. The same goes for actually choosing the assets you invest to, although the impact of this risk can be partially mitigated by diversification.
Lack of flexibility
Not only this strategy ties up your capital for a while, it provides little insulation against market crashes or unfavorable price movements. The essense of this strategy relies on you ignoring short-term market volatilties and thus not cutting on any losses like other risk-mitigating strategies suggest. Sometimes, this lack of flexibility may result in capital losses for your investment.
eToro doesn’t charge any management or rollover fees as well as no comission charged on long positions for stocks and ETFs, which is very important for the buy-and-hold strategy. However if the assets you invested into pay out income in the form of dividends in the meanwhile these might be taxed in accordance to your residential area. Spread is also applicable to trading positions so do invest some time analyzing the costs associated with implementing the buy-and-hold strategy on eToro.
If you do not have the time, skills and knowledge to monitor your trading yourself, buy-and-hold is not the only available option. CopyTrader technology allows you to replicate positions of other traders on the eToro platform with the amount of money that is suitable to your budget. Some CopyTraders themselves implement buy-and-hold strategy or its variation as well as other long-term investment strategies. Remember that this does not guarantee you success and any trading involves capital loss risks.
Hopefully this article made the strategy of buy-and-hold a little more clear to you. Despite its risks and drawbacks, buy-and-hold remains one of the most popular strategies for a very long time and requires a trader to pick assets correctly and keep them for a right amount of time. Beware of the capital loss risks and enjoy trading on eToro!
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