The phrase ‘buy-and-hold’ is often derided as the most basic form of investing in ASX shares. It’s easy to understand and requires little ongoing effort to execute. For these reasons, it’s sometimes ragged upon.
But the ‘buy-and-hold’ strategy has many famous spruikers – including the great Warren Buffett. Buffett even once famously said that his favourite time to sell a share is ‘never’.
So is there merit to this view?
Benefits of buy-and-hold
The main reason so many investors find the buy-and-hold strategy a superior one is due to the fact it bypasses the psychological foibles of being human. See, we’re often our own worst enemies when it comes to investing.
We have a tendency to want to buy more shares if one of our companies goes up in value – and buy even more if it continues to rise.
Conversely, we also have a nasty habit of pushing the sell button when our companies’ share prices fall – especially during a market crash or other kind of panic.
Both of these behaviours violate that most basic law of good investing – buy low, sell high.
And that’s where ‘buy-and-hold’ really helps us out. If you go into investing with a ‘I’ll never sell’ attitude, the likelihood of ‘doing something stupid’ (as Buffett would put it) is far lower.
Another (far greater) benefit of the buy-and-hold approach comes from the magic of compound interest. The best companies in the world are exceptionally good at taking their profits and reinvesting them at high rates of return for even higher profits down the road. That’s partly how CSL Limited (ASX: CSL) was able to grow so fast over the past two decades.
If you buy a company like this, and just hold it over a long period of time, you’ll almost certainly be better off than trying to dip in and out.
Finally, it’s worth noting that buying and selling shares isn’t free. There are transaction fees like brokerage to consider, as well as taxes. Buying-and-holding negates many of these extra burdens – leaving more cash in your pocket at the end of the day.
Risks of buying-and-holding
Of course, no strategy is perfect and this one is no different. Buy-and-hold can be great if you’ve found a winner like CSL. But if you pick a lemon and don’t cut your losses, you can end up losing far more capital than if you got out early. Ergo, buy-and-hold only works with winners (and arguably index funds).
Foolish takeaway
The buy-and-hold strategy is one that I think has a lot of merit, and one I employ myself to a degree as an investor. However, it’s not an excuse to be apathetic with your shares. Buying-and-holding a company into the ground can be a costly mistake. You still have to make sure your company is ahead of the game and has what it takes to stay ahead!
And on the topic of buy-and-hold shares, here’s one from our experts.
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Returns as of 6/5/2020
More reading
- In a post-COVID world, could Australia be the next superpower?
- ASX 200 Weekly Wrap: New ASX bull run continues
- 3 of the best ASX 200 shares to buy and hold for 10 years
- Why I’d buy and hold CSL shares forever
- How to find winning ASX shares in a recession
Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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