Photo credit: Jef Poskanzer
I am not against buy and hold strategy. Instead, I believe it can really bring you great wealth – note that the world’s richest investor is a buy and hold strategist. Many investors are familiar with this strategy and often practise it, but not many are successful. Here are some of the reasons that may have caused their failure:
1) Fail to plan for future money needs
Many people are myopic such that they only see the near future of 3 to 5 years ahead, and some may even see shorter than that. When it comes to investing, they foresee they do not need the money and are willing to part with their money and invest in stocks for the “long term”, so as to grow their money. It is good that they are doing something for the future, but they have not considered a possible big purchase or major financial commitment may arise few years down the road. The major financial commitment can be marriage or buying a house. In order to free up some capital, they would usually liquidate the stocks. They would be very lucky if they can make a small profit, as buy and hold strategy is only profitable long term, safely to say 10 years and above.
Thus, it is important to know what your potential money needs in the future before you invest with buy and hold strategy. Do make sure you really do not need the money for any kind of events, either fortunate and unfortunate. Set aside a sum of money before you invest so you do not need to liquidate prematurely.
2) Weak psychology towards market downturn
As a buy and hold strategist, you cannot afford to be affected emotionally by the ups and downs of daily stock movement. Warren Buffett mentioned that he does not care if the stock exchange closes for 10 years! Unsuccessful buy and hold strategist tends to hold when losses are small, but when the losses sustain further, he or she may not have the tenacity to hold anymore and will liquidate the stocks.
Investors with weak psychology cannot endure the pain of holding when the chips are down. During a downturn, a 50% reduction in their portfolio is normal, and how many investors would be able to handle the pain?
3) No discipline and determination
As we mentioned previously, buy and hold strategy would most likely be profitable 10 years and above. However, you may be able to buy near a market bottom and make a small gain when the market recovers in a year or two. You would feel good about yourself and sell your holdings to realize the profits. The success ingredient in buy and hold strategy is time. You have to understand the power of compound interest, where your profits will grow exponentially. Your capital doubles, triples, quadruples, or more, depending on the time horizon you are invested. This is the edge that the strategy can give you. If you have no patience for a good 10-20 years minimum, you basically lost the edge.
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