Glossary
Buy and hold
A long-term approach of buying investments and keeping them through market ups and downs instead of trading in and out.
Buy and hold is an investing approach in which you purchase securities, most often diversified funds, and keep them for many years regardless of short-term market swings. The idea is that broad markets have tended to rise over long periods and that frequent trading adds costs, taxes and the risk of missing the best days. It is the opposite of market timing and of active short-term trading.
Why people use it
- Costs stay low. Fewer trades mean fewer spreads, fees and mistakes.
- Taxes are deferred. In a US taxable account, gains are not taxed until you sell, and holdings kept more than a year qualify for lower long-term capital gains rates.
- Missing a few big days is expensive. Many of the market's strongest days have come during or just after sharp declines, when nervous investors were most likely to be out.
Limits and common misreadings
Buy and hold works best with diversified holdings. Holding a single stock indefinitely carries the risk that the company declines permanently, which broad indexes avoid by replacing laggards over time. The approach also requires the discipline to sit through bear markets: the S&P 500 fell about 57% from its 2007 peak to its 2009 low, and investors who sold near the bottom locked in that loss.
"Hold" rarely means "never touch." Most long-term investors still rebalance their allocation, adjust it as their goals change, and add money regularly through dollar-cost averaging.