A buy and hold strategy is a form of passive investing, where an investor buys stocks and holds on to them for the long term, usually at least five years.
One of the most important aspects of a buy and hold strategy is patience. Investors need to be willing to wait out periods of volatility in order to reap the benefits of long-term growth.
Keep reading this article to learn about three methods for developing a solid buy and hold strategy!
Table of contents
- The Difference Between Passive and Active Investing
- Buy and Hold Strategy vs Active Investing
- There Are Three Main Types of Buy and Hold Strategies:
- 1. Dividend Growth Strategy: This Strategy Focuses on Investing in Stocks That Offer a High Dividend.
- 2. Value Strategy: This Strategy Focuses on Investing in Stocks That Are Undervalued by the Market.
- 3. Growth Strategy: This Strategy Focuses on Investing in Stocks That Have High Growth Potentials and Strong Earnings per Share (EPS)
- Why Should You Consider Building a Buy & Hold Strategy?
- The Bottom Line
The Difference Between Passive and Active Investing
Investing is an important part of the economy, but many people make investing mistakes when they are starting out.
Investing can be done in two ways:
- The first way is Passive investing, which can be done by buying stocks or other securities and holding them for a long period of time.
- The second way is Active investing, which can involve buying or selling stocks in order to profit from short-term price changes.
Both methods are legitimate ways to achieve long-term financial security or work on your retirement planning.
However, passive investing has been shown to have higher returns than active investments over the long term. This is because passive investments are not subject to the effects of market timing and emotional decision making that may affect active investors.
Buy and Hold Strategy vs Active Investing
Because the buy and hold strategy is a long-term, passive strategy in which investors maintain a relatively stable portfolio over time despite short-term fluctuations, it has some advantages over active investing.
The success of buy and hold investing has been demonstrated by historical data, and it is the preferred investing strategy of industry titans like Warren Buffet.
Buy and hold is also advantageous for investors who do not have a lot of time to spend researching the investment trends, which is not the case with active investing, where you must constantly check the data.
The main disadvantage of the buy and hold strategy is that it requires a significant amount of capital.
There Are Three Main Types of Buy and Hold Strategies:
1. Dividend Growth Strategy: This Strategy Focuses on Investing in Stocks That Offer a High Dividend.
A successful dividend growth strategy should prioritize quality over quantity, which means that investors should look for value stocks with a proven track record of dividend payouts and solid fundamentals.
They should also have a long-term investment horizon that allows for regular reinvestment of earnings. In any market cycle, this is critical to long-term growth and sustainability.
When putting their strategy into action, investors should consider these 3 factors:
1. Invest in Sector Fundamentals
Sector diversification is an important component of a successful investment strategy, and it is also critical for dividend earnings.
A growth strategy prefers to be more diversified across sectors than a simple dividend strategy, which focuses solely on yield. This ensures that you can maintain a profitable stock portfolio during times of volatility and rising interest rates.
Dividend growth strategies look at sector fundamentals and companies with strong balance sheets, as opposed to simple dividend strategies, which typically include utilities, consumer staples, and financial companies.
2. Concentrate on Dividend Growth Leaders
Dividend activity is a much better proxy for company performance than yield size because dividends are generated from a stock’s underlying earnings.
That’s why factors like free cash flow, share repurchases, and earnings forecasts are so important in dividend stock selection.
These factors also ensure that the company will be able to increase its payouts in the future. High yields do not provide this level of security.
Dividend growth leaders also tend to raise payouts faster than inflation, adding real value to your portfolio.
The Federal Reserve sets an annual inflation target of 2%, and recent data indicate that price growth is exceeding that target. Stocks that increase their payouts at a faster rate should be avoided.
3. Select ETFs Focussed on Custom Dividend Strategies
Investors should not stop there, as selecting companies with a long payout history may not be sufficient to address issues such as inflation and sector fundamentals. At the same time, yield may simply be reflecting a stock’s recent decline.
To mitigate some of these risks, investors should consider dividend growth exchange-traded funds (ETFs).
Dividend Growth ETF (DGRW), which can be used to supplement existing dividend strategies, and the Vanguard Dividend Appreciation ETF (VIG), which provides an easy way to gain exposure to dividend growers without being overly exposed to a single company, are two examples.
2. Value Strategy: This Strategy Focuses on Investing in Stocks That Are Undervalued by the Market.
Value investing is an investment strategy that entails selecting stocks that appear to be trading at a lower price than their intrinsic or book value.
Value investors actively seek out stocks that they believe the stock market is undervaluing. They believe that the market overreacts to both good and bad news, resulting in stock price movements that are unrelated to a company’s long-term fundamentals.
The overreaction provides an opportunity to profit by purchasing stocks at a discount—on sale.
3. Growth Strategy: This Strategy Focuses on Investing in Stocks That Have High Growth Potentials and Strong Earnings per Share (EPS)
Growth investing is a type of investment style and strategy that aims to increase an investor’s capital.
Growth investors typically invest in growth stocks, which are young or small businesses whose earnings are expected to grow at a faster rate than their industry sector or the overall market.
Many investors are drawn to growth investing because investing in emerging companies can provide impressive returns (as long as the companies are successful). However, because such businesses are untested, they frequently pose a high risk.
Growth investing and value investing can be contrasted. Value investing is an investment strategy that entails selecting stocks that appear to be trading at a lower price than their intrinsic or book value.
Why Should You Consider Building a Buy & Hold Strategy?
We can’t predict the future. We can’t know what will happen to the stock market, or what will happen to our investments. But we can prepare for the worst and hope for the best.
To do this, you need a buy & hold strategy. This is a strategy that helps us to protect our investments from volatility in the market by buying stocks and holding them for extended periods of time.
Since the buy and hold strategy is a form of passive investing, it’s recommended to compare the yield to other forms of passive income, such as real estate investing or on high yield savings accounts.
The goal of buy & hold is to keep your money invested in stocks even when they are down so that you don’t miss out on long-term growth opportunities.
It is always prudent to invest in your own financial independence and to mitigate risks associated with an insecure economy.
The Bottom Line
The buy and hold strategy is one of the most popular passive income strategies. It is also one of the easiest to implement.
This strategy involves buying and then holding a stock for an extended period of time. The goal is to purchase stocks that are undervalued and then wait for them to appreciate in value over time.
