Investors can debate about the best investment strategies all day long, but the truth is no single strategy is perfect for everyone. With various risk tolerances, financial goals, and other factors, agreeing on what leads to financial success is hard to achieve. However, the buy and hold strategy is typically recognized as having benefits that are hard to argue against. An investor may use the strategy primarily, while others use it for only specific investment types. Here are the main benefits of the buy and hold strategy and how to incorporate it into your investment strategies.
Avoid Transaction Fees
The buy and hold strategy is exactly what it sounds like. An investor buys a stock and holds onto it for multiple years without performing any transactions on it. Most investments charge a transaction fee when any type of transaction is performed. Even at 1%, this fee can add up over time. For example, investing $20,000 at an interest rate of 7% will actually turn into an interest rate of 6% if you perform a transaction each year. But with the buy and hold strategy, you leave the investment alone and take advantage of the full 7% interest rate, which can potentially equate to a six-figure difference depending on how long you hold the investment.
Take Advantage Of Long-Term Capital Gains
An investor who actively trades may experience short-term capital gains, but their long-term capital gains will likely suffer at the same time. Short-term capital gain tax can be significantly higher than long-term capital gains, depending on your specific financial situation. Taxes can significantly hinder your returns and they are often overlooked when developing investment strategies. Investors typically get a more favorable treatment with taxes when they have long-term capital gains, which is exactly what the buy and hold strategy creates.
Use The Buy And Hold Strategy For Multiple Investment Types
The good news with the buy and hold strategy is it’s not designed solely for stock investing. You can use the same strategy with other types of investments as well, including exchange-traded funds (ETFs), mutual funds, and more. Many investment strategies in general incorporate the buy and hold strategy naturally since it’s difficult to argue against the benefits. Fewer transaction fees and better tax advantages have a higher likelihood of helping an investor achieve the financial success they are striving for.
Stock Investing Info looks at different investment strategies based on each client. While the buy and hold strategy may not be the only method an investor wants to look at, it offers plenty of benefits to at least incorporate it somewhere in your long-term plan. Proper planning, patience, and a long-term vision will likely make the buy and hold strategy a successful one. If you’re interested in discussing various investment strategies based on your financial goals, don’t hesitate to contact us and we would be happy to talk about different options for you.