Avoiding the 3 Pitfalls of 'Buy & Hold' Investing

Rumors of the demise of 'buy & hold' investing are greatly exaggerated, to say the least.

Purveyors of market timing would like us to believe that this investment strategy is no longer relevant to the pandemic dominated market environment.

Vaccine discovery hopes had lifted market sentiment even before the regulatory authorizations arrived, with the successful start to the inoculation exercise helping cheer us up even though the scourge is still very much all around us. The associated air of optimism has been a boon for the stock market, pushing the major indexes to record levels.

The resulting stock market investing experience for the thousands of new investors that entered the market during the pandemic has been nothing short of heady. With this all-around sentiment positivity lifting all stock market boats, investors are at risk of reaching the wrong conclusions from their recent success and discarding long-held investing beliefs, including the virtues of ‘buy & hold’ investing strategies, as no longer relevant.

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 a 'buy & hold' strategy over any other investing 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 to make sure that the primary reason(s) why they picked the stock(s) was still valid. This helps them avoid unnecessary changes.

Let me give you an example from the Top 10 Stocks for 2020 portfolio that follows a calendar year ‘buy & hold’ strategy. The portfolio did extremely well, outperforming the broader market more than 7X. But one of the software stocks, HubSpot (NYSE:HUBS), lost more than a third of its value through mid-March as the pandemic took hold. I didn’t ignore the sell off, but my due diligence convinced me that while the near-term outlook had undoubtedly worsened as a result of the pandemic, the long-term thesis still held. Our level-headedness paid off, with the stock up close to +150% this year. SiteOne Landscaping (SITE), another Top 10 for 2020 stock, had an even bigger sell off through mid-March, but eventually recovered and will end the year up in excess of +70%.

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Zacks Investment Research

Written By: Zacks Investment Research