A solid buy and hold strategy can work in building future wealth, but also can tax the nerves of the less experienced investor.
Long-term investments offer a bigger reward than trading in and out of the market. Just ask Warren Buffet - many of the "Oracle of Omaha's" investments have been held for decades. While watching your investment portfolio decrease in value without taking action can be challenging, the key to a buy-and-hold investing strategy is having the patience to withstand the inevitable ups and downs of a volatile market.
In other words, getting caught up in market swings can send many inexperienced investors to the selling table. And, by selling and waiting for the right time to reinvest, there is the chance of participating in the long-term appreciation of the market.
What Are Buy and Hold Stocks?
Buy-and-hold stocks are long-term investments that you feel comfortable keeping for at least one year – but preferable for several. By holding stocks through several market cycles, you have a much better chance of walking away with more significant profits. And keep in mind that when we say "stock," we're also referring to not only high-quality individual stocks but stock indexes and mutual funds.
But how do you know which stocks are suitable for long-term investing? The best strategy is to use a combination of fundamental and contrarian indicators to make your decisions.
Fundamental Indicators
The key tools in long-term trading are fundamental indicators. They tell you if a stock, industry group, or index (such as the S&P 500) is undervalued or overvalued. Fundamental indicators include things like:
When looking at a particular company, for example, comparing its earnings, debt, cash flow, and potential growth, you can estimate the company's current financial health and whether or not its potential for future growth is strong enough to warrant you holding your investment for years – or even decades.
Contrarian Indicators
Unlike fundamental indicators, which help to prove a company's strength, contrarian indicators go against standard analysis. This means that you see potential in a stock you think is being overlooked at the time and are willing to take a chance investing in an up-and-coming company or industry.
Short and pull-call stock option ratios are all contrarian indicators that may make you take notice of a particular stock. Keep in mind, however, that using contrarian indicators does make your purchase riskier, although the benefits of a successful buy can be quite profitable when you hit the mark.
Buying and holding stocks for the long term takes a certain amount of faith, patience, and the ability to see the big picture. Long-term investing is not for the weak or skittish, and it is certainly not for those out to make a quick profit. The ability to foresee future opportunities and the calmness to stick it out when the market experiences unexpected lows can all work towards more significant investment returns.
The Bottom Line
The buy-and-hold strategy can work in building future wealth, but the ups and downs of the market may tax the nerves of the less experienced investor. However, when the goal is long-term appreciation, the buy-and-hold strategy offers a history of success - primarily when investing in a broad index of stocks. Please consult a qualified financial professional if you need clarification on whether any investment or strategy is suitable for you.
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