Is Buy and Hold for you?

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Buy and hold is more for investors than traders

You may have heard statements like:

Buy and hold for the long term
It is time in the market not timing the market that makes you money

Mutual fund companies sometimes advertise that if you missed the 10 best days during a five year period, your returns would have dropped dramatically. What they do not tell you is that if you missed the 10 worst days of the same five year period, your returns would have increased dramatically.

Holding stocks for long periods of time works great when the companies stock price looks like this:

Chart courtesy of StockCharts.com

But works poorly when the companies stock price looks like this

Chart courtesy of StockCharts.com

In the first case by holding Petrochina (PTR), you would have made about 450% on your money in three years while in the 2nd case holding Foundry Networks (FDRY), you made about 10% over the same three year period.

The above stock charts are only based on three years of data. Some might say three years is too short for this type of strategy and that you need to look at decades. If you use this strategy, make sure you understand it.

By its nature, trading requires action while the buy and hold strategy requires sitting on a position for long periods with the expectation that the share price will appreciate in value. Since trading is active while buy and hold is passive, the buy and hold strategy is really best for investors.

For more information of these types of strategies look in our section on fundamental analysis where the writers tend to buy and hold more than technical traders.

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