The smart way to ‘buy and hold’
"Buy and hold." You won't see this phrase screaming out at you from the investment magazines or the multitudes of websites devoted to investing. But you will find those three little words in the vocabulary of the most successful investors.
What, exactly, is a "buy-and-hold" philosophy? Perhaps it can be best understood by looking at what buy-and-hold investors do and what they don't do.
Buy-and-hold investors do:
Stick with a group of high-quality securities for the long term.
Sell these securities only when there is a good reason to do so.
For example, they may decide that a particular stock is no longer appropriate for their holdings, either because the company's management has changed or because consumer attitudes have moved away from the company's product. They may be entering the later years of their retirement and want to shift their portfolio toward more income-oriented investments. Or, there may be other reasons associated with the specific stock or the investor's objectives.
Buy-and-hold investors do not:
Worry about the short-term ups and downs of the market.
Worry about what companies are the latest headline-grabbers.
Sound good, right? Yes but buy-and-hold isn't as easy to follow as it sounds.
It can be easy, even for buy-and-hold investors, to panic when the market declines. When prices fall too far, some investors start selling shares.
It also can be tempting to buy new stocks after a long period of market advances. But if you do, you're "buying high" in direct contradiction to the age-old investment advice of "buy low, sell high."
To be a successful buy-and-hold investor, you clearly need to avoid these mistakes. But how? Start by assessing your investment personality. Are you willing to take on a higher degree of risk in exchange for potentially greater returns? Or will you accept a lower return, provided you have the comfort of investing in vehicles that don't fluctuate greatly in value? Learn your risk tolerance and use it as a guiding principle in choosing investments.
Besides making decisions rooted in their investment personalities, buy-and-hold investors typically spread their money among a variety of asset classes, such as stocks, bonds and government securities. Even a relatively "conservative" strategy such as buy-and-hold becomes risky if you're only buying and holding one type of asset. By diversifying your holdings, you'll cushion the effect of downturns affecting just one market segment so you won't feel so pressured into selling your stocks when prices dip.
By following a prudent buy-and-hold strategy, you will avoid some of the consequences of ill-advised efforts to "time" the market or chase after hot stocks. You'll also free yourself from the hassles of constantly checking up on your investments' performance. And if you've chosen good stocks with strong fundamentals, capable management and sold business plans, your prospects for long-term success are favorable.
Jason Haney is a local investment representative with EdwardJones. He can be reached at (913) 441-9431.