Buy and hold

Buy and hold, also called position trading, is an investment strategy where an investor buys stocks and holds them for a long time, with the goal that stocks will gradually increase in value over a long period of time.

This is based on the view that in the long run financial markets give a good rate of return even while taking into account a degree of volatility. Buy-and-hold says that investors will never see such returns if they bail out after a decline. This viewpoint holds that market timing (i.e. the concept that one can enter the market on the lows and sell on the highs), does not work; attempting such timing gives negative results, at least for small or unsophisticated investors, so it is better for them to simply buy and hold.

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds. Today, there is a plethora of market indices in the world, and thousands of different index funds tracking many of them.

Passive management is an investment strategy that is primarily used by the two firms with the largest amounts of money under management, Barclays Global Investors and State Street Corp.

Buy-and-hold is the general concept of investment by which the related decisions to purchase or to sale are not influenced or conditioned by the contingent volatile conditions of market prices.

One argument for the strategy is the efficient-market hypothesis (EMH): If every security is fairly valued at all times, then there is really no point to trade. Some take the buy-and-hold strategy to an extreme, advocating that you should never sell a security unless you need the money.

Others have advocated buy-and-hold on purely cost-based grounds, without resort to the EMH. Costs such as brokerage and bid/offer spread are incurred on all transactions, and buy-and-hold involves the fewest transactions for a given amount invested in the market, all other things being equal. Taxation law also has some effect; tax for long-term capital gains may be lower, and tax may be due only when the asset is sold (or never if the person dies). Warren Buffett is an example of a buy-and-hold advocate who has rejected the EMH in his writings, and has built his fortune by investing in companies at times when they were undervalued.

The strategy was less popular in early 2009.

Analytical application

For a single event firm T-month BHAR is defined as:

$BHAR_{i(t,T)}=\prod _{t=1}^{T}*(1+R_{i,t})-\prod _{t=1}^{T}*(1+R_{B,t})$

where:

BHAR_i(t,T) - the buy-and-hold abnormal return for rm i in the period between months t and T

R_i,t - the return of the rm i in month t

R_B,t - the return on the matched (benchmark) portfolio in month t

In order to test the statistical significance of the results (1) the average BHAR (ABHAR) needs to be calculated and (2) t-test needs to be applied. The formulations are as follows:

$ABHAR=\sum _{i=1}^{N}w_{i}*BHAR_{i}$

$t=\left({\frac {ABHAR}{\frac {({\sigma _{BHAR}}^{2})^{0,5}}{n}}}\right)$

where:

ABHAR - average BHAR

w_i - value weight based on the market capitalization of the event firms

n - the number of observations

σ_BHAR² - the variance of BHAR

Real estate investment

A buy and hold strategy can also apply to real estate. According to this concept, a person will buy a property, such as a house, and not sell it. This is typically done with borrowed money, although part of the plan is that the loan will eventually be paid off, and it is then not a leveraged investment. It contrasts with a trading strategy.

See also

• Passive management
• Sell in May, an alternative strategy

External links

• Never Sell: Buy and Hold Forever (Efficient Market Canada, Investment Magazine)
• The Buy and Hold Apocalypse: Motley Fool article
• John Bogle, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, Dell, 1994, ISBN 0-440-50682-4
• Mark T. Hebner, Index Funds: The 12-Step Program for Active Investors, IFA Publishing, 2005, ISBN 0-9768023-0-9
• Interactive Java Applet "'Buy and Hold' - How much can you make over longer time periods?"