Buy and Hold Strategy

Mutual fund investors often use a long term investment strategy called the buy and hold strategy. The stock market has so many diverse companies to invest in, making it the best place to try and make money for patient investors. While some investors can make money quickly, most investors spend a lot of time in the stock market employing several tactics to try and make money.

To employ a buy and hold strategy, an investor simply researches the stocks they are interested in, buys them and holds onto them despite the ups and downs of the market. The buy and hold stocks should make up the core of an investment portfolio and provide stability to an investment portfolio. The core investments of an investment portfolio are usually slow-growing stocks or mutual funds and are rarely traded.

Some examples of good core investments include the following: US Treasuries, gold, and companies with good fundamentals. These types of investments typically have the best recovery rate from a stock market collapse.

The buy and hold strategy also states that buying in a down market and selling in a high market does not always work, so it is best to hold onto the stocks as a long-term investment. Some investors will participate in day trading with their stocks, while other advocates of buy and sell believe that a stock should only be sold if the investor needs money. The buy and hold strategy does have a solid record of success, however without proper knowledge of the companies investors buy, they will lose money.

It is important not only to research the stock or mutual fund, but it is important to research the fund manager as well. New funds often do not have a track record to go by and often use the same fund manager as a successful stock. Using a successful fund manager may not guarantee success for a new fund, but it will help investors when selecting an unproven mutual fund. New funds often use the same standards as proven funds and typically have a better chance at being successful. Fund managers are also important because they are in charge of taking the necessary steps toward market correction when the market is overpriced. A fund manger should have access to the fund's annual report and will be able to determine what the underlying equities are.

Mutual funds have a limit at to what managers can do. The best managers are able to provide their investors with confidence in knowing they are reacting properly to the mutual fund. Obviously the more limits a mutual fund has placed on a manager, the less the manger is able to do. Every mutual fund should come with a few limits and an experienced manager will know how to deal with them.

Mutual funds empower the buy and hold strategy in a bear market. The bear market is when the stock market falls and remains down for a long time. Typically the market has to be down by 20% in order for it to be considered a bear market. Whenever the corporate prices fall, some investors panic and begin selling their stock before they are forced to take a large loss. These investors cause a bear market to erupt and a bear market can last for a few months to a few years. The 1970's are a prime example of a bear market since the stocks were sideways for over 10 years.

Bear markets are not too bad for investors that plan on keeping their stocks for a long time like the buy and hold investors or the value investors. During a bear market, investors can purchase great stocks because they will retain their value when the stock market rises again. Companies that look like they plan on being in business 10 or even 30 years from now are great stocks to pick up in a bear market. Some companies that have this potential are food companies and "essential" companies like shampoo manufacturers and deodorant companies. No matter how bad the economy gets, people will continue buying the essential products like shampoo, razors, soap, and food.

A bear market is a terrible time to trade stocks because investors will not make any money on their stock. Instead they need to jump into stocks because history does repeat itself and the stock market will rise again someday. No one can predict the timing of the stock market; therefore it is impossible to state when the market will go back up. Investors shouldn't wait too long for the stock to go back up before they buy. You shouldn't miss out on growth because you are worried. It is always a hard time for every investor during a bear market, the best way to make it through is to focus on the long-term and not the here and now. Too many investors try to track their investments on a daily basis and only become frustrated when the market continues to decline. These investors are typically the ones that sell their investments right before it starts to go back up. Be patient with your investments during a bear market and look for other investments during this time that will have potential growth.

Warren Buffet is an advocate of the buy and hold strategy, in fact that is where he made a lot of his money. Smart investors understand that the buy and hold strategy focuses on the growing potential of long-term companies, not the buying and selling of stocks on a short-term level.

Anne Schreiber is a perfect example of a savvy buy and hold investor. During the 1930's, she invested most of her savings into stocks that she understood. She took a good look at her lifestyle and evaluated the products she used on a daily basis, like medications. She purchased shares in movie companies like Lowe's, Columbia, and Paramount. She also purchased shares in Pepsi and Coca-Cola because she enjoyed drinking the beverages. Miss Schreiber stayed with these stocks through the ups and downs for over 40 years. Her final net worth was valued over $22 million dollars in 1995. This is a great example of the buy and hold strategy. Miss Schreiber represents the average investor that is looking at the stock market as a long-term investment instead of a short-term investment. She proved that you could make money using the buy and hold strategy and by having a lot of patience and faith in the stocks you have selected.
The underlying value of the stock is the most important aspect of the buy and hold approach. Investors need to ignore the daily numbers of the stock market and stick with Warren Buffet's approach which is to think of the value of the company, not the value assigned by the stock market. Companies that have consistent profits are the best companies for buy and hold investors to select as they will remain consistent and continue turning a profit in a bear market.

Even though buy and hold investing is a great long-term strategy, it does come with a price. History has shown that bear markets can drag down the stocks of even the good companies. Companies like Google have actually seen their stock decrease this year, even though they have been one of the highest-performing stocks in the past. The goal of buy and hold investing should focus on only losing one or two percent during a bear market. The stock of those companies should immediately pick up when the stock market starts to rise again. Some stocks will only rise by only two or three percent while the NASDAQ rises by fifteen percent. Unfortunately for the buy and hold investors, their safe approach to investing didn't make them as much money as the risk investors.

One thing that makes a buy and hold strategy hard is that it is impossible to time the market. It is hard for investors to select the up trends of certain stocks and not the down trends of those stocks. Unfortunately many buy and hold investors aren't sure when it is time to sell their stocks, when is it time to cut their losses? What happens to the stocks of the buy and hold investors when the stocks plummet by 50% or more? Can all the buy and hold investors continue to believe in companies like Coca-Cola and follow the value of the company over its performance? Not all buy and hold investors will find the same results as Warren Buffet.

On the other hand, no one knows what the stock market will look like 10 or 20 years from now. Buy and hold investors need to look at their investment portfolio and make sure they are selecting stocks that will see growth. Avoid the companies that have lost their competitive edge, as they will probably not exist 10 years from now. Investors need to think about technology and the future and decide what companies will be able to be there in the future. Buy and hold investors need to think about the basics, decide what products people will always need (like food) and seek out the stock of those companies instead of the "get rich quick" stocks.