Understanding buy-and-hold investing?

What you’ll learn:

• How buy-and-hold investing works
• Why you might want to buy-and-hold
• The pros and cons of buy-and-hold investing.

Learn in 10 – Buy-and-hold

Short on time? Watch this 10-second video on buy-and-hold investing.

Buy-and-hold means committing to your chosen investments for the long term rather than buying and selling funds or stocks and shares frequently. You might have heard the expression that successful long-term investing is all about ‘time in the market’ and not ‘timing the market’, as it is so difficult to predict ups and downs, certainly with any regular degree of accuracy.

Essentially, buy-and-hold is the opposite of trying to ‘beat the market', which involves trading on a regular basis, in the hope of staying ahead of the crowd.

What's the theory?

The main idea behind buy-and-hold is that you stay invested throughout market cycles, as even missing just a few of the best days can have a major impact on your long-term returns.

But despite the evidence in support of buy-and-hold investing, many investors find it difficult to leave their investments alone.

This is often because the anxiety and discomfort associated with a higher level of investment risk can make it tempting to over-trade. During periods of market volatility, a sensible buy-and-hold investment can quickly turn into an active trading strategy. This can mean that not only do you end up buying and selling at just the wrong time but you also increase your investment costs via trading commissions.

The idea behind buy-and-hold is that you are eventually rewarded for taking extra risk but only if you leave your investments alone.

But there are no guarantees. You can buy-and-hold and may still lose money in the end.

Investors may also fail to achieve good returns because their portfolios are too concentrated in the shares of just one or two companies. While this higher level of risk could potentially earn a higher return, there is a very real danger that a specific company doesn't perform as expected, or even goes out of business. A well-diversified portfolio helps investors reduce the risks associated with company or industry-specific events.

The pros and cons

There are some other advantages to a buy-and-hold strategy. First, it makes for an easier investment journey because you only need to choose investments at the outset. Once you've built your portfolio, you won't need to make changes or check prices. It also makes it less likely that you'll make badly timed decisions. The whole point is that you hold the investments for a long time. Second, since there'll be fewer transactions you'll pay less in commission and fees, which can make a huge difference to your long-term investment returns.

However, like any investment strategy there are downsides as well. In a true buy-and-hold strategy, you'd be holding onto your investments no matter what happens. This means losses could be potentially severe, as you wouldn't sell your investments even if they continue to drop for some time. You could carry on holding them until they're worth very little or nothing at all.

But it is worth remembering the benefits of ‘pound-cost averaging during periods of market volatility. This essentially means that if you are investing on a regular basis your contributions will buy more shares when prices are low and less when they are expensive. Over the long run, this should help smooth out your returns, although this is not always the case, particularly if you invest in a rising then falling market.

Find out more about how pound cost averaging works

Things to think about

Any investment comes with risk and there's always the chance you'll get back less than you expect, or even less than you invest. If you're comfortable putting your money away for a long you can accept the risks involved and are not keen on actively trading, then a buy-and-hold strategy could be for you. But there's no guarantee your investments will grow in value and, by not actively managing your portfolio, it may mean you miss out on opportunities in the market.

If you're not sure which investment strategy is right for you, you may want to seek independent financial advice. You'll need to pay for this, but it may help you work out how best to achieve your investment goals.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.