Strategie
Buy and Hold: The Dullest and Most Effective Strategy
Key takeaways
- Buy and hold means purchasing a diversified asset and holding it for decades regardless of downturns.
- The strategy works through compound interest and by eliminating the costs of frequent trading.
- The greatest threat to buy and hold is not a market crash but the investor who sells during one.
- Historically there is no 20-year window in which globally diversified equities delivered a negative return.
- Buy and hold combines best with regular purchases through DCA or lump sum.
Buy and hold is an investment strategy in which you purchase a diversified asset — most commonly a global equity ETF — and hold it without selling for years to decades regardless of market swings.
Why it works
Equity markets have historically had an upward trend: despite all crashes, crises, and recessions, the global equity index has over the long term returned to new highs and surpassed them. Those who stayed invested earned. Those who sold during a downturn and waited for the "right time" to buy back in typically missed part of the recovery.
The power of compound interest also contributes: every year reinvested returns generate further returns. Interrupting this process by selling is costly.
The costs of active trading
- Transaction costs — every buy and sell has a spread and a fee
- Tax costs — realizing a gain triggers a tax liability; in the Czech Republic gains are exempt after the three-year holding period test
- The cost of missed days — the best market days cannot be predicted; missing even the 10 best days over 20 years significantly reduces total return
Psychology: the hardest part
Buy and hold is simple on paper but difficult during a 30% crash. When the news is forecasting the end of the world and the portfolio is in the red, instinct commands you to sell. This is exactly where the strategy succeeds or fails. Two things help: not looking at the portfolio during a crisis, and having a long horizon where you see a downturn as an opportunity, not a threat.
The strategy pairs well with understanding why market timing does not work and making regular purchases through DCA.
FAQ
What is the buy-and-hold strategy?
You purchase a diversified asset (typically a global ETF) and hold it without selling for years to decades. You do not react to market swings or news. The strategy benefits from compound interest and the upward trend of markets.
How long does it take for buy and hold to work?
The longer the horizon, the more reliably it works. Historically there is no 20-year window in which globally diversified equities produced a negative real return. Shorter horizons can end unfavorably.
What should you do during a downturn when following buy and hold?
Ideally nothing — or even buy more. A downturn is a natural part of the strategy. Selling during a downturn and waiting for better times is the most common mistake among long-term investors.
Is buy and hold the same as passive investing?
Almost. Passive investing usually also involves choosing an index fund or ETF rather than actively picking individual stocks. Buy and hold is an approach to timing — it tells you when not to trade.