Understanding The Risks Associated With The Buy And Hold Strategy In Canada
Want to invest in stock market? Have you figured out the buy and hold strategy? If not, this blog will cover all the risks associated with this strategy you need to know.
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Have you researched and shortlisted some of your favorite stocks? Do you believe in the theory of long-term investing to gain protection from market volatility? Well, “Buy and Hold” exists for all ages, but it is a risky proposition. Let us delve deeper and gain more knowledge about it.
Search for some investment advisors or even the finest portfolio developers and ask them about the duration of an ideal investment.
There are no surprises here as they all will say only one thing with a cheeky smile: “Invest with a long-term horizon, dear, and you will be fine.” Well, does it indeed hold? Keep reading till the very end, and you will find your answer.
What Is a Buy and Hold Strategy?
Let us begin traditionally. It is time for some “definitions.” “Buy and Hold,” the term is simple, and so is this investment strategy.
Purchase the equity stocks, debt instruments, ETFs (Exchange Traded Funds), Mutual funds, or any other investment asset and forget it for at least a decade. Following this strategy, you may not analyze or even pay heed to the daily difficulties in the price of your assets, which is primarily because of the daily market fluctuations.
Of course, you need to ignore all the determinants of a typical market, such as
- The political stability prevailing in Canada
- Wars, pandemics, terrorist attacks, or any other global event/ development
- The actions of High-frequency traders, short-sellers, operators, and manipulators
- The announcements made by the Bank of Canada (our central bank)
- And any other factor that can influence the market sentiments
Following a buy and hold strategy will invest with ease while you sit back and relax. In short, disappear and forget that you ever invested.
Buy and Hold a Beloved Investment Strategy
Buying it is easy. You need to put your money. Relaxing is super easy; you are free from the hassles of reviewing the market daily.
The “buy and hold” has often drawn cult-like attention from investors, with its popularity soaring higher and higher. It usually happens because of the following advantages that this strategy offers to its followers:
1. It is the Easiest
Look for the fundamentals of the organization, analyze the P-E ratio, the Earnings per share, make a purchase, and keep holding.
Or,
Follow our stock recommendations, buy the stock, and hold it.
How often have you heard these statements? Well, I suppose every time you wanted to invest.
That is the true nature of a typical hold-and-buy strategy. Do some preliminary research before making a purchase, then keep holding your assets for extended periods. Can it get easier than this?
2. Protects from Regular Market Volatility
We widely believe that a stock market runs on rumors, investor sentiments, and domestic and global developments.
The prices of investment securities are sensitive to any added information generated in the market. It creates buying-selling interests that decide the security prices and creates volatility in the market.
Long-term investors following the buy-and-hold strategy usually protect themselves from these daily volatilities and even operator-triggered market crashes.
3. Easy on Pockets
Since you are not trading daily, a buy and hold strategy helps you save hundreds of dollars in brokerage, commission, transaction charges, taxes, and other processing costs.
What Are the Several Criticisms Drawn by The Buy and Hold Investment Strategy?
It is always tough to criticize the “buy and hold,” which is nothing less than a holy grail of investing. But there are several risks associated with this strategy mentioned:
1. Overall Portfolio Returns
A typical investment market runs in phases, with bull and bear being the most common ones. As per a study performed by several trading analysts,
“In a defined and set period with scope for minor variations, a market crashes severely and then bounces back.”
No one can predict the precise opening of a bull and bear phase in the market. A buy and hold strategy will increase the chances that:
- You entered the market during the bull phase (this happens most commonly)
- You waited for all those years to make a substantial gain, as you were expecting the prices of your investment assets to go up.
- All these years, the bull phase ended. It triggered the initiation of a bear phase that resulted in a fall in the prices of the securities held by you.
- You ended up making a loss instead of a gain as your portfolio generated negative returns (or sub-par returns)
2. Following “Buy & Hold” You Buy Stocks at a Premium
Undoubtedly, the market attracts investors during the bull phase. It is tempting to see the stock prices going up daily. For most investors, it creates an urge to have a pie of the profit.
“Everybody is earning from the market. Can I try too”–It is a universal saying of the typical investors, especially when the market is performing well.
Thus, a typical buy-and-hold strategy prompts the investors to buy the stocks during the bull phases of the market at a premium. Buy the stocks at higher prices:
- You cannot realize any capital gain
- Usually, a correction phase will wipe out all the premium
- It will generate losses for you
3. “Hold and Buy” Triggers Normal Trading Psychology
Losing money is tough! A rational investor will never enjoy it if the trades go wrong direction. Neither can you ignore the fact altogether as written in the hold-and-buy rule book.
If your market timing was inappropriate, you are bound to witness the bear phase during those waiting years.
It will certainly trigger all those negative feelings of panic, fear, anxiety, and nervousness, making you sell the assets you hold at a loss because you cannot see them going down daily.
Of course, if your portfolio is 50% down, you cannot wait for the other half to get vanished. Instead, you will ignore all your prior commitments, rush to your trading screen, and try to close your positions as soon as possible.
It does nothing well and tosses the beliefs, principles, and rules of long-term investing in the trash.
