THE BUY-AND-HOLD
INVESTMENT STRATEGY

Explore the buy-and-hold strategy; a long-term approach to investing. Discover how it works in practice and consider the potential advantages and disadvantages of incorporating it into your overall investment strategy.

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The buy-and-hold strategy is a cornerstone of long-term investing. As the name suggests, it offers a cost-effective and convenient way to gain exposure to the financial markets and navigate market fluctuations by buying assets and holding them for the long term.

While the comparative returns of buy-and-hold strategies typically compare well with other strategies, developing a deeper understanding of its advantages and disadvantages and learning how to integrate it effectively with your investment approach will help you to optimize your returns. Keep reading to discover why many view it as a robust approach to building wealth and developing financial independence over time.

The fundamentals of buy-and-hold investing

As the name suggests, buy-and-hold investing offers a convenient and relatively passive approach to investing through buying assets and holding them for the long term. The focus is on long-term potential and growth over time, as opposed to short-term gains.

Investors have varying interpretations of what “buy and hold” should mean, but there are some key principles at the core of the strategy.

“Time in the market, not timing the market”

This phrase echoes the core elements of buy and hold and encourages forgoing the opportunity to buy and sell stocks at optimal times. It is admittedly difficult to buy at the bottom and sell at the top, but keeping some capital as cash, investing it in financial instruments and taking advantage of long-term macroeconomic events and market cycles can optimize returns.

Minimizing trading frequency

A key principle of buy-and-hold strategies, and all passive investment approaches, is to minimize trading frequency. This reduces frictional costs such as trading commission, and allows investors to spend less time managing their portfolios.

While a buy-and-hold approach is relatively user-friendly and frees up time for other matters, optimizing returns still requires monitoring positions and considering periodic portfolio rebalancing. 

The challenge for buy-and-hold investors is deciding whether a poorly performing position will recover, or if reallocating capital is more beneficial. The best approach is to conduct thorough initial research to build confidence in your strategy and stay informed through news events and earnings reports.

Rebalancing may also be necessary due to life events such as approaching retirement or achieving investment targets associated with your “financial independence, retire early” (FIRE) plan. In such cases, capital preservation becomes a priority, potentially leading to a shift from volatile assets to more stable ones such as bonds.

Stability

A stable portfolio allows investors to become more familiar with the assets they hold, making them (and any business or macroeconomic events that might impact them) easier to track and monitor.

Asset selection

The approach is more about how you manage your portfolio rather than what instruments it’s made up of. That being said, a buy-and-hold strategy should identify instruments likely to appreciate in value and match positions with your personal investment time horizon, such as retirement or specific future milestones.

Any asset can be included in a buy-and-hold portfolio, but stocks and bonds are popular asset classes due to their inherent nature of being well-suited to long-term investment.

A typical buy-and-hold portfolio might be weighted towards blue-chip stocks and bond positions, but there is room to allocate some capital to highly speculative investment ideas such as cryptoassets or the stocks of start-up tech firms. Not all of those investments will come good — however, if invested in a small size, the downside will be minimized, and there is still potential for considerable gains to be made.

An even easier way to invest in an instrument that tracks the overall performance of the financial markets is to buy ETFs (exchange-traded funds). These come with built-in diversification and with one-click offer exposure to a sector, region, asset class, or particular stock index. 

ETFs also offer cost-effective diversification. For example, the expense ratio of the VOO ETF is 0.03%, so if you invest $10,000, the annual management fee will be $3.00.

Diversification

Portfolio diversification is particularly important in buy-and-hold strategies, to spread risk across markets. Diversifying capital across different financial areas helps to mitigate the risk of one position underperforming. Greater diversification also aligns with the goal of some buy-and-hold investors to track, rather than beat, the market.

Spreading your capital across different asset groups can reduce the overall level of P&L volatility. This is important if you’re investing on a multi-year time frame, as you can be certain that at some point, the wider markets and your portfolio might suffer a sudden, hopefully short-term, drop in value. 

Taxation

Taxation also needs to be addressed right from the start. Choosing to invest using certain tax-efficient vehicles could help you avoid sharing some of your returns with tax authorities, and as capital growth could be significant, special attention should be paid to capital gains tax (CGT).

Historical performance of buy-and-hold strategies

Buy-and-hold investing is based on the assumption that asset prices tend to go up more than they go down. It does not discount the possibility of short-term price depreciation but proposes that overall gains will (in the long term) match investor expectations.

Historical price data from equity markets largely backs up the claims made by buy-and-hold advocates. 

The Vanguard S&P 500 ETF is considered a benchmark for the wider equity market. The S&P 500 suffered a price crash of over 30% during the recession in 2007–2009, but even with this bearish price movement factored in, the $VOO fund recorded a 10.55% compound annual return in the 30 years up to 2024.

The dollar-cost averaging (DCA) strategy can complement the buy-and-hold strategy nicely. Both are long-term investment approaches that can mitigate the impact of market volatility on investment returns. It complements the buy-and-hold strategy by fostering disciplined investing and reducing the reliance on market timing, potentially decreasing the average cost per share over time, particularly during market downturns. 

Combining dollar-cost averaging with buy-and-hold can assist investors in steadily building wealth over the long term.

Warren Buffett: a buy-and-hold success story

One of the most high-profile buy-and-hold investors is Warren Buffett. His investment fund, Berkshire Hathaway Inc, has achieved impressive average annualized compound returns of 19.8% since its inception in 1965.

Berkshire Hathaway’s approach has become synonymous with buy-and-hold investing, emphasizing long-term investment strategies. Its outperformance compared to the S&P 500 Index underscores an important lesson for those seeking to emulate Buffett’s approach. 

The key strength of Berkshire Hathaway lies in the fund managers’ adeptness at selecting stocks — well-managed and undervalued companies — and holding positions until the share price reflects the true value.

Advantages vs disadvantages of the buy-and-hold strategy

Below, we consider the advantages and disadvantages of the buy-and-hold strategy:

Advantages	Disadvantages
Long-term growth potential: By holding investments over prolonged time periods, investors benefit from the compounding effect of returns.	Opportunity cost: There is an unavoidable opportunity cost associated with the buy-and-hold approach. Tying up a large percentage of your available capital in long-term positions means that you will have to forgo other short-term investment opportunities.
Minimal trading activity: Buy-and-hold strategies typically involve minimal trading activity, which reduces transaction costs such as brokerage fees and taxes associated with frequent buying and selling.	Limited flexibility: Buy-and-hold investors commit to their chosen assets for the long term, which can limit flexibility in responding to changing market conditions or individual investment performance. This can be challenging during periods of market volatility or when certain assets underperform.
Simplicity: Buy and hold is a passive approach to investing, requiring less time and effort compared to active trading strategies.	Risk of holding poor performers: Investors following a buy-and-hold strategy may face difficulties deciding whether to continue holding underperforming investments or reallocate capital to more promising opportunities. This can lead to missed opportunities for optimizing returns.

Final thoughts

Nothing is guaranteed in the financial markets, but empirical data points to the fact that a buy-and-hold strategy offers an effective strategy to build wealth over time. A lot of the work is front-loaded and completed during the planning stage, as ongoing management simply involves patience rather than dedicating time to more research. 

It might be a simple approach, but this should not result in it being discounted, and if you’re able to mimic the performance of some of the famed buy-and-hold investors, you could go on to make life-changing returns.

Visit the eToro Academy to learn more about the buy-and-hold investment strategy.

Quiz

FAQs

How does the buy-and-hold strategy mitigate the impact of market volatility?

Developing a strategy based on the premise that you are going to weather any storms experienced by the financial markets can help you hold on to positions when others are selling at the bottom of the market. If you’re following that principle, you may also choose relatively low volatility assets, which are easier to hold on to when market crashes occur. 

What types of assets are best suited for a buy-and-hold approach?

This will come down to your personal investment aims. If your investment time horizon is only a few years, you may favor lower-risk assets such as bonds and blue-chip stocks in case the time you want to liquidate coincides with a market crash. If you have more flexibility over your timeline, then you might want to scale up on risk-return and allocate some capital to positions in growth stocks and cryptoassets. 

How often should investors review and adjust their buy-and-hold portfolios?

Checking your positions too frequently can trigger unnecessary interventions and overtrading and cause you to drift away from the principle of long-term investing and efficient portfolio management. A preferable approach is to diarise regular checks of your portfolio. If you follow the tried-and-tested route of investing in stocks, you could use an Economic Calendar to identify the dates when earnings reports are released, and companies update investors on trading conditions and future prospects.