If you’re buying stocks for your IRA, it helps to have a strategy. One of the most classic ones (Warren Buffet is a famous proponent) is buy and hold.
Buy and hold investors purchase stocks with the intention of keeping them for the long term—no matter what’s happening in the market. These investors ride out any market fluctuations with the expectation that prices for the stocks they’ve chosen will always increase given enough time, despite occasional market pullbacks.
The appeal of this investing approach is its simplicity. Once an investor buys a stock (or a portfolio of stocks), there’s really nothing left to do but wait for the investments to become profitable—years or decades later.
The buy and hold approach is simple, but does it work? Studies indicate that it depends on how long you hold your investments. Performance statistics suggest that you need to hold stocks for at least 20 years to ride out market fluctuations.
Historical data compiled by Oppenheimer, for example, show that stocks have not had an average annualized loss in a 20-year holding period since 1950. “Historical evidence suggests that longer investment horizons typically produce better results,” says Brian Belski, chief investment strategist at BMO Capital Markets and former chief investment strategist with Oppenheimer.
Smart Stock Picks
Of course the success of any buy-and-hold strategy depends on making good stock picks, and even then there are no guarantees that the stocks you choose will perform well. Successful buy-and-hold investors research their investments, analyze the numbers and look for companies that show promise—and stability.
Warren Buffett, the billionaire philanthropist behind Berkshire Hathaway and one of the world’s most successful investors, believes buying good companies—and hanging on to them—is the key to building wealth. “The money is made in investments by investing and by owning good companies for long periods of time,” says Buffett. “If they [investors] buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
Invest in What You Know
One of Buffett’s investing rules is that if you don’t understand a business, don’t buy it. The idea is that it’s easier to hold onto an investment for the long term if you know and trust the business.
According to Buffet, “If you had a chance to buy into a good company in your hometown…and you knew it was a good company and knew good people were running it, and you bought in at a fair price, you wouldn’t want to get a quote every day…. You’d look to the earnings and dividends over the years as determining whether you made a good investment or not,” instead of constantly checking prices and worrying about their inevitable fluctuations.
Not for Everyone
Buy and hold doesn’t work for everyone. One of the challenges is that you really have to trust that the buy-and-hold system works. If you sell off investments that aren’t performing well right now, you don’t give them the chance to rebound. For some people, sitting by and watching investments tank in the hope they’ll recover simply isn’t an option.
Rather than follow a passive strategy (i.e., buy and hold), these investors typically prefer an active approach. That entails buying and selling stocks according to how they are performing, including drawing a line in the sand that dictates when to exit losing positions. The idea is to lock in gains when you have them and limit losses along the way.