Avoiding the 3 Pitfalls of 'Buy & Hold' Investing
Zacks Investment Research | Jul 29, 2020 03:15AM ET
Rumors of the demise of 'buy & hold' investing have been greatly exaggerated, to say the least. This strategy is as relevant in the current pandemic market environment as it is in normal times.
Stocks have made a strong recovery since the March 23rd bottom, with all the major indexes now at or close to pre-pandemic levels. This rebound followed the sharpest market downturn in history, in which stocks lost more than a third of their value after peaking on February 19th.
The tens of thousands of new investors that have entered the market during the COVID-driven shelter-in-place environment appear to have gravitated towards active trading instead of building long-term portfolios. They seem to have bought into claims from purveyors of market timing who never tire of reminding us that the ‘buy & hold’ investment strategy was no longer relevant to the current environment.
It is important to remember that long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it has ever been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of this investing strategy over any other approach.
But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:
1) 'Buy & Hold' Doesn't Mean 'Buy & Forget’
Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.
Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle (NYSE:ORCL) of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well-informed of what is going on with each of their holdings and stay ready to make necessary adjustments as market conditions evolve.
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