What is buy and hold Trading Strategy
The buy and hold strategy is a long-term investment approach, where the investor makes a recurring purchase of the same stock regularly. You can choose to hold the stock for a few months, years, or even decades. Selecting a stock wisely could allow an investor to gain a regular income and produce an excellent return on their investment. Read more about some of our other best trading strategies.
Compounding Gains to Increase Wealth
One reason the buy and hold strategy works so well is because of the compounding principle. Learn more about trading compounding strategies here.
Compounding is when you make money on your investment; then, you roll the profit you just made back into the original investment. For example, let’s say I start with two dollars, then I make two dollars on the trade. That is a profit of 100%. Then I take that two dollars I made and roll that back into my next trade; that is compounding. The process is ongoing, and the gains you make continue to grow faster. But it gets even better than that! The longer you do it, the faster you gain, and eventually, you could make millions of dollars.
To illustrate compounding even further, I want to ask you a question. Would you rather have one million dollars at the end of 30 days or a penny that doubles its worth every day for 30 days? Think about it before answering. I hope you chose the penny because you’d be getting over ten million dollars at the end of 30 days if you did. Compounding your income over time will do the same, but it takes many years.
Consistency is part of the buy and hold strategy.
If you are a trader who doesn’t have a large sum to invest initially, the best way to grow your account is to add money to your position, weekly or monthly, consistently. Even if the amount is small.
I cannot emphasize enough the importance of consistency. I have seen traders with a strong desire to make money with the buy and hold strategy and fail because they do not consistently follow the plan.
Don’t Stop Investing.
Life gets messy, you need money, you want stuff to buy, and disasters happen. If you’re going to have consistency work for you, you must keep investing, and you must not take the money out.
Best Buy and Hold Strategies
Now that you understand the potential benefits of the buy and hold strategy, we will demonstrate our three favorite approaches for you. They are the dividend strategy, the star principal, and the ETF strategy.
The Star Principle Buy and hold strategy.
The first buy and hold strategy you will learn is the Star Principle. Richard Koch talks about this strategy in detail in his excellent book, the Star Principle.
There are two primary components you should know.
1) Buy a growing or new industry
Find a new and growing industry to invest in. The reason it should be a new industry is that new industries are known to produce exponential gains. There are many years ahead for rapid growth. For example, when Google started at the beginning of the internet, the growth was exceptional, and if you had invested early on, you would have done exceptionally well.
2) Find a leader in that field
New industries create a great deal of excitement and growth and, many companies try to take advantage of the opportunity. Typically, one company emerges as the dominant figurehead and far outperforms all the other companies. One recent example of this is Netflix. Netflix is the leader in the new category of streaming movies and had you invested, you would have made massive returns on that investment.
Our investment strategy would be to invest in the best new company in that industry because they have dominated the market and already proven that they can perform well. As time goes on, the stock that you buy regularly will be worth a lot.
Buy and Hold Strategy Losing Money
What if the trade is losing you money? You can do several things to adjust your strategy and help expand the power of compounding profits.
The first thing to do if your stock is not making money is to evaluate the company and ask several questions. Did any of the fundamental data in the company change? For example, did the revenues drop?
Is there a new competitor?
Were there challenges or obstacles that came up that the company was not aware of when you first invested?
Did anything change the future projections of the company?
If there are no changes, then you would want to “dollar-cost average” your stock.
What is dollar-cost averaging?
Dollar-cost averaging is when you buy the same stock when the price goes lower to get a better price. Here is how it works: If you buy one share of stock for $100 and that same stock goes down to $50, you spend another $100 to buy two more shares.
Now you have three shares, and the total cost is $66 per share. If the price goes back up to $100 per share, you make $34 per share. Dollar-cost averaging is a great strategy to help you compound if you still believe in the company.
When to sell your stocks with the buy and hold strategy?
If the stock price goes down and you find yourself losing money, or you find out that the company fundamentals have changed after you evaluate the company.
If the company is not as successful as it once was, then it might not be the great company your original research had suggested. Then it would be best if you decided to sell before you lose a sizable amount of your investment, and put the funds towards a different star company. Then you can watch your compounding investments continue to grow. And add your money to another Star business. If you don’t move your money, you will be stuck holding a losing stock, and you will not realize profits.