What is Passive Buy and Hold Strategy

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There are types of strategies investors uses regularly. Some of them are passive and active, growth investing, value investing, income investing, contrarian investing, dividend growth investing etc. Invest and forget style falling to the passive investing method. Where investors buy the stock and hold for long time to generate wealth for long time.

Buy and hold strategy prominently known as passive investment strategy or invest and forget style. This strategy is good to an extend, but have its own demerits. Here we are discussing about the pros and cons of long term passive investing or buy and hold strategy.

What is invest and forget or passive investing strategy?

In this investment method, investors buy the stocks or shares of companies with an intention to hold for long time and no intention sell in the short time. Investors following this strategy heavily rely on the fundamentals of the business.

Advantages of buy and hold strategy

  1. Major advantage of this strategy is, the brokerage, commission, advisory fees etc will be less. Thus would help to save good amount of money compare with active investing.
  2. In this strategy, investors hold the stock for long time and the capital gain tax will be reduced. Tax rate for long time capital gain is lesser than short time capital gain.
  3. Only one time investment is required with this strategy. This would help to save lots of time on evaluation and research on stocks. Also, reduce the requirement of regular monitoring of the investments.
  4. This strategy help investors to sit free when stock markets are fluctuating. This is due to the strong fundamentals of the businesses they have invested.
  5. Long term passive investments give relatively stable portfolio regardless of short time stock market fluctuations.
  6. Like any other investment style, diversification give extra security with this strategy.

Disadvantages of buy and hold strategy

  1. Capital tied up with each stocks would be comparatively high and this is a risk. Also, the investors should have enough discipline to not run behind any other investments during the period of long time investment made with this strategy.
  2. Buy and hold strategy take time to see the growth. Because of you have invested to an asset heavily doesn’t mean you are entitled for a large reward for the time and and capital you have invested.
  3. Right diversification is mandatory to protect investments for long run, especially from the industry related issues and troubles.
  4. It also required to have a prudent risk management strategy to pull the money back in no time once identified a huge, possible losses may occur.
  5. Investors with long term investment strategy generally have a practice of forgetting the investments for long time. This would some time put them in trouble by not knowing major news’s on the company time such as delisting of shares from the stock market, bankrupt or any negative events that affect the investments very badly.

Important points to remember when using buy and hold strategy

While using the buy and hold investment strategy, investor should have excellent idea on the below points:

  1. Buy and hold strategy help investors to create relatively stable portfolio for long time regardless of market fluctuations.
  2. While investing, investors should focus diversifying the portfolio well.
  3. Long term investment strategy can be applied to other asset classes too such as real estate, investing in gold, silver investing etc..
  4. time to time monitoring still required with this strategy such as market situations, company news’s etc to avoid unlimited and unexpected losses.
  5. This strategy is ideal for investor who do not have much time to spend on finding stocks and keep following up the investment portfolio.
  6. This will help to sit free from short time market fluctuations.