Buy and Hold Investing, Explained

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  • Options-can-help-a-buy-and-hold-strategy-OMN4C7C-x-large300A lot of beginner investors start their projects with a lot of confidence and motivation. However, when stocks start going down for a prolonged period of time, that confidence disappears and they wonder what their next step should be. A piece of decent advice – assuming that the investments in question are sound – is to hold on to them.

    True, abandoning investments as soon as they go sour is a sure way to cut losses and get out before the situation gets worse. However, it also cuts you off from any potential gains down the road. Markets have peaks and valleys – it’s their nature. Even if you see your ETF in the red, things could change within weeks, days, or even hours. The buy and hold method recommends waiting out the storm and holding on to investments.

    Money Smart Guide, a personal finance blog, advises readers, “Those that followed our philosophy of buy and hold investing did well. In fact, most earned back the money lost from the market crash in 2008 by mid-2011. We did have one client, though, that didn’t do so well. He was a trader and would make all kinds of trades based on his ‘hunches’ and ‘fears.’ His portfolio was always down while his wife’s, who followed our advice, was usually doing well. He questioned why her returns are always so much better than his. He didn’t like the answer.”

    Of course, there is no guarantee that every investment will recover after a loss in value. What you should take from this advice is to try and be less sensitive to the day-to-day flux of an investment or market in general. Instead of sitting on the edge of your seat, learn to be patient and wait out a financial crisis. It will at least afford you an opportunity of making money – which selling low will not.

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