Is Buy and Hold Investing Right for You?
There’s certainly something exciting about the prospect of day trading, or buying stock one day and then selling it the next for a profit. And thanks to online outlets like e-Trade, the average schmoe with a computer and an internet connection, or even a smartphone, can put some money in an account and start trading like a pro. Okay, so it takes at least a small amount of knowledge to enter the stock market in this fashion and make money, and there’s a school of thought out there that deems this nothing more than a form of gambling, especially for untrained investors who are just winging it. Buying low and selling high is definitely appealing, especially when it happens quickly. But you’re equally likely to lose your shirt if you invest haphazardly. For this reason you might want to consider the alternate strategy, or buy and hold investing, by which you purchase stock with the intention of holding it long-term, through ups and downs, to increase your odds of coming out ahead. But is this staid strategy right for you?
In truth, any type of investment has the potential to backfire, although some commodities are almost certain to rebound if you hold them long enough. Take gold, for example, which in the last decade has fluctuated from low to high. The reason in this particular case might have something to do with the intrinsic value of the commodity itself, but the value of stocks can be swayed by any number of factors beyond your control; case in point, the poor economy. Depending on the type of stock you invest in, prices may vary by the products a particular company produces, federal or state legislation, or even the weather. This is why the stock market is often considered volatile. And even companies that seem stable and have been around for decades can fail, leaving you holding a handful of worthless paper.
That said, buy and hold may have some advantage over day trading in the long term, but with the caveat that you have to know when to hold and when to fold, not to mention where to put your money. If, for example, you stand to earn a significant windfall by selling sooner than anticipated, you might want to take the money and run (or reinvest it, in any case). After all, what are you waiting for if not gains? On the other hand, you don’t want to get in the habit of trading too often for the simple reason that it will cost you. With brokerage and other fees attached to every transaction, frequent trading could eat into your profits.
Of course, what you really want to avoid is losses, and this takes equal amounts of skill and luck. The skill comes in choosing the right companies or stocks to invest in as well as nailing the timing when it comes to buying low and selling high. And the luck you have little control over. If you invest in an oil company, one of their offshore tankers could explode, spilling millions of barrels into the ocean and tanking their stock. They may or may not rebound. Or if you engage in currency trading, a massive printing of paper money could destabilize the market. You just never know what’s on the horizon. So if you want to keep your money safe, you might as well stuff it in the mattress or put it in a bank. When you invest it you risk losing it, but buying and holding stocks could be a bit safer than other options if you’re careful and smart about it.