The Power of Buy-and-hold: why Patience Pays off in Investment

Introduction  

Investors have always taken advantage of the market by understanding when the market for a specific asset is low and high but falling. This understanding alone has created millionaires from investors (Warren Buffet being a strong example). 

Expert investors believe that the best way to outsmart the market is to time it. This process involves attempting to buy when the price is low but rising.  

Then, you sell it when the price is high but taking a downward shift. The point in between is called the holding period.  

Long-term investments are all about buy-and-hold tactics, which are often called the best investment strategy. Stock market investments require you to time the market right twice: once when you buy and once when you sell. However, most fail to do so.  

That’s why the buy-and-hold strategy is safer. Also, holding an investment for the long term yields higher returns.  

5 Reasons Why Buy-and-Hold Strategy Works in Stock Market Investments  

An avid trader would review S&P 500 performance and other stock market indices before starting their trade. They have to look for different market parameters and data points constantly. But investments are far from that.  

Here are five reasons why a buy-and-hold strategy works well in stock market investments.  

1. Investments Grow Despite a Volatile Market 

The U.S. stock market is volatile. There are always fluctuations. Money spent in some stocks constantly goes up and down, killing the confidence of buy-and-hold investors who are here for the long haul.  

Although past performances shouldn’t be the key benchmark of a stock’s future performance, historically, the stock market always bounces back. History shows that the market has always recovered from potential declines, giving investors a positive return.  

Over the last 35 years, the market has posted a positive annual return close to all eight of the 10 years.  

2. Buy-and-Hold Keeps You in the Game 

Warren Buffet has shown a strong capability for buying and holding stocks to boost his wealth. He held on to some stocks for years and some for decades. Individual investors often find it hard to stay in the long term investment game while missing a few key days or weeks.  

The hardest part of this type of investment is knowing when to be in the market and when to go out. Buffet himself has shown major turnover in terms of his buy-and-hold strategy, dropping major industries like drugs, financial, and airline-related stocks since 2020.  

A general rule of thumb is to know when to be absent from the market within your major two or five years of investment through the five to ten years of tenure.  

Historically, a massive share of stock market gains or losses happens in a few days of any given year. So, staying with the buy-and-hold approach is ideal for adding stocks to your bottom line.  

But what about going out of the market? We can refer to the cardinal rule of selling for that. Sell stocks if they fall below 7% to 8% below the amount you paid for them. It’s a basic principle you can use to cap your potential downside.  

Still, a winning investment strategy depends on waiting for that profitable time of the year through buy-and-hold.  

3. Potential for Faster Loss Recovery 

Patience pays off in investment, and the following example defines that well. Most investors seeing instant loss can use buy and hold for quick financial recovery. Here’s how it works – 

Buy-and-hold investors can quickly recover from losses even after the S&P 500 index falls close to 20% from its recent high. Investors who invested in the S&P 500 in January 2008 can see a 37% loss in their investment value.  

In this case, the investment will be $630 at the end of 2008. Now, the investor can take one of two actions.  

First, they can put the money in a bank with a 3% interest rate compounded monthly.  

Secondly, the money can go under a buy-and-hold strategy and continue with the stock investment.  

The second action would allow the investor to recoup their investment by 2012 without adding more money to their funds in the original stock investment.  

On the other hand, the money they put in the savings account would take 16 years to recover. 

So, buy-and-hold is one of the best strategies for recovering from investment losses.  

4. Benefits of Compounding 

Instead of investing more money, invest more time. That’s the power of investing with a buy-and-hold tactic. Compounding is the most essential and powerful investment tool for leveraging time for continual financial growth.  

For example, when someone invests around $100,000 in the S&P 500, they can expect their money to be more than doubled by 10 years, leading to $286,000. If the money is invested for 30 years, it can also grow to $1,800,000.  

Yes, past performances don’t offer an inflation-adjusted return at a 7% rate at the end of a year, as they did at the beginning. These gains start to accumulate over a period and can also provide an advantage to people who invest early and use their money for compounding.  

5. Dividends are a Big Win 

The best time to investing in stock markets is ‘right now.’ Many amateur investors often wait for the right time to put their money in the stock market, thereby sacrificing their chances of gaining dividends.  

Many investors also believe that the stock dividends are considerably low and, hence, can be avoided. But that’s a huge mistake on the investor’s part. 

Even though they are low, dividends can be significant ways for investors to pull more money out of their investments. These small rewards add up to the investment, assisting investors in getting huge returns through reinvestment.  

It would be wise to reinvest the dividends earned through investment automatically. Reinvestment helps purchase additional resources, doubling or tripping the investment over time with the power of compounding.  

However, there are potential downsides to this investment method that need to be kept in mind.  

Investment dividends in a taxable account can automatically make that amount subject to deduction. That’s why it’s more profitable to work on other investments that can prove more productive.  

It’s best to discuss this with a financial advisor before making these types of investment decisions.