One of the most successful methods of trading is the buy-and-hold trading strategy. Unfortunately, this has fallen out of favor recently. Still, this strategy is responsible for creating more millionaires than any other trading method in the history of the markets. It worked great in the past and works even better today.
The buy and hold strategy is a long-term investment approach, where the investor makes a recurring purchase of the same stock regularly. You can choose to hold the stock for a few months, years, or even decades. Selecting a stock wisely could allow an investor to gain a regular income and produce an excellent return on their investment. Read more about some of our other best trading strategies.
Does Buy and Hold trading still work?
The traditional buy and hold strategy has not performed well recently because traders hold stocks and do not actively manage them when they are not performing well. Our modified version has better performance, and it’s faster. Also, a traditional buy-and-hold strategy is passive because you wait years and do not make changes to your portfolio, or you trust someone else to make your decisions. We prefer to have an active plan that manages positions regularly.
Our strategy is active because we continually monitor all of the stock positions we hold, and we make changes if the company’s underlying fundamentals show failing or faltering. In other words, we would change the stock and minimize our losses because we switched to a better company. Before we get into the buy and hold strategy details, I want to share two of the most powerful concepts of why our strategy works. When we understand the “why”, we can then study the “how.”
I call these concepts The Two C’s – Compounding and Consistency. Once you understand these concepts, then you can learn the buy-and-hold trading strategy.
Compounding Gains to Increase Wealth
One reason the buy and hold strategy works so well is because of the compounding principle. Learn more about trading compounding strategies here.
Compounding is when you make money on your investment; then, you roll the profit you just made back into the original investment. For example, let’s say I start with two dollars, then I make two dollars on the trade. That is a profit of 100%. Then I take that two dollars I made and roll that back into my next trade; that is compounding. The process is ongoing, and the gains you make continue to grow faster. But it gets even better than that! The longer you do it, the faster you gain, and eventually, you could make millions of dollars.
To illustrate compounding even further, I want to ask you a question. Would you rather have one million dollars at the end of 30 days or a penny that doubles its worth every day for 30 days? Think about it before answering. I hope you chose the penny because you’d be getting over ten million dollars at the end of 30 days if you did. Compounding your income over time will do the same, but it takes many years.
Below is an illustration of how compounding works to grow your wealth at an accelerated speed.
Consistency is part of the buy and hold strategy.
If you are a trader who doesn’t have a large sum to invest initially, the best way to grow your account is to add money to your position, weekly or monthly, consistently. Even if the amount is small.
I cannot emphasize enough the importance of consistency. I have seen traders with a strong desire to make money with the buy and hold strategy and fail because they do not consistently follow the plan. Also, check our this trading plan template.
The best example of this situation is the famous story of the tortoise and the hare.
The tortoise and the hare planned to race. The hare was so excited to win. He knew that he could win because he is naturally much faster than the hare. He bragged to all of his friends about how easy of a win this would be, and then he went home and took a nap. The race started and the hare was nowhere to be found. Meanwhile, the tortoise was on his way to the finish line. It was a long rocky road, but the turtle never gave up. He just kept going. One step at a time.
Eventually, the hare woke up and just thought he would zip to the finish line because of his natural ability. Unfortunately, the tortoise had already won! The hare represents the trader who doesn’t want to be consistent, and the tortoise represents a consistent trader. Even a small amount, added to your account CONSISTENTLY over time, will produce amazing results. Remember: Slow and steady wins the race!
If you CONSISTENTLY re-invest your profits, the interest COMPOUNDS at a much faster rate. These are the 2 Cs. You WILL gain income over time. Moreover, you will be gaining FASTER each year that you add funds to your position. ie) $10 that doubles to $20 vs. $500 that doubles to $1,000.
Don’t Stop Investing.
Life gets messy, you need money, you want stuff to buy, and disasters happen. If you’re going to have consistency work for you, you must keep investing, and you must not take the money out.
To illustrate the power of compounding and consistency, take a look at the chart below:
If you would have bought McDonald’s stock at a rate of $100 a week for the last 50 years, you would be holding a total of $13,639,077.03 today.
Best Buy and Hold Strategies
Now that you understand the potential benefits of the buy and hold strategy, we will demonstrate our three favorite approaches for you. They are the dividend strategy, the star principal, and the ETF strategy.
The Star Principle Buy and hold strategy.
The first buy and hold strategy you will learn is the Star Principle. Richard Koch talks about this strategy in detail in his excellent book, the Star Principle.
There are two primary components you should know.
1) Buy a growing or new industry
Find a new and growing industry to invest in. The reason it should be a new industry is that new industries are known to produce exponential gains. There are many years ahead for rapid growth. For example, when Google started at the beginning of the internet, the growth was exceptional, and if you had invested early on, you would have done exceptionally well.
2) Find a leader in that field
New industries create a great deal of excitement and growth and, many companies try to take advantage of the opportunity. Typically, one company emerges as the dominant figurehead and far outperforms all the other companies. One recent example of this is Netflix. Netflix is the leader in the new category of streaming movies and had you invested, you would have made massive returns on that investment.
Our investment strategy would be to invest in the best new company in that industry because they have dominated the market and already proven that they can perform well. As time goes on, the stock that you buy regularly will be worth a lot.
If you had purchased $10,000 of Netflix in 2005, you would have made $1,788,015 dollars already. See the chart below:
There are hundreds of more examples of companies that could have made you rich had you applied the Star Principle.
Buy and Hold Strategy Losing Money
What if the trade is losing you money? You can do several things to adjust your strategy and help expand the power of compounding profits.
The first thing to do if your stock is not making money is to evaluate the company and ask several questions. Did any of the fundamental data in the company change? For example, did the revenues drop?
Is there a new competitor?
Were there challenges or obstacles that came up that the company was not aware of when you first invested?
Did anything change the future projections of the company?
If there are no changes, then you would want to “dollar-cost average” your stock.
What is dollar-cost averaging?
Dollar-cost averaging is when you buy the same stock when the price goes lower to get a better price. Here is how it works: If you buy one share of stock for $100 and that same stock goes down to $50, you spend another $100 to buy two more shares.
Now you have three shares, and the total cost is $66 per share. If the price goes back up to $100 per share, you make $34 per share. Dollar-cost averaging is a great strategy to help you compound if you still believe in the company.
When to sell your stocks with the buy and hold strategy?
If the stock price goes down and you find yourself losing money, or you find out that the company fundamentals have changed after you evaluate the company.
If the company is not as successful as it once was, then it might not be the great company your original research had suggested. Then it would be best if you decided to sell before you lose a sizable amount of your investment, and put the funds towards a different star company. Then you can watch your compounding investments continue to grow. And add your money to another Star business. If you don’t move your money, you will be stuck holding a losing stock, and you will not realize profits.
Dividend Buy and Hold Strategy
A dividend is when a company pays you a fixed amount of money to hold stock. A current example of this is Exxon Mobil, and they pay $3.48 a share. At the time of this writing, the stock’s price is $61.35 per share, so if you bought 100 shares, it would cost $6,135. You would get $348 a year for holding that stock, which is about a 5% return on investment per year.
How do you find good dividend stock? We find quality dividend stocks by looking at two different factors.
- Find a company’s stock that increases in value year after year.
- Choose a stock the increases revenue year-over-year
You can find these types of stocks by using the yahoo finance stock screener. If you use this dividend calculator, you can see the possible gains that can be made using dividend buy and hold strategy.
If you start with $100,000 in 20 years, you will make over $74,000 in dividends alone and enjoy increasing your stocks from $100,000 to $1.3 million. Yes, the Dividend Buy and Hold Strategy does produce great wealth.
To show you how well this strategy would work, take a look at the chart below:
ETF buy and hold strategy
The third strategy is the ETF buy and hold strategy. An ETF (or exchange-traded fund) is a fund that holds several stocks. An ETF can have as few as 10, to as many as 500.
An ETF is a basket of stocks. The stocks are put together based on a specific category and are traded as individual one stock. There are ETFs for many different types of classes. Here are some examples of some of the most prominent ones.
- Top Stocks in a Stock Exchange
- Best Gold Stocks
- Best Energy Stocks
- Best Healthcare Stocks
There are many different ETFs to consider. You can check them out by clicking here.
The Advantages of the buy and hold ETF strategy.
The first advantage of the ETF trading strategy is that you get a group of the best stocks in one ETF. Trading with an ETF is helpful because the ETF creator you bought it from already did their research on all the best stocks, so you can take advantage of their research. Each ETF has a complete listing of all the stocks in that ETF. Another advantage is that it reduces the risk of losing all of your investment. If one stock completely fails, you will not lose money because you still have more stocks in that ETF.
The Disadvantages of the buy and hold ETF strategy.
The primary disadvantage of this strategy is since the ETFs are baskets of stocks, the gains of one individual stock are limited. So just like the risk is tiny, the profits are also reduced. For example, if the ETF is holding Netflix and Netflix increases 2,000%, you will only gain a small percentage of that.
Fractional buy and hold trading.
One of the problems associated with buy and hold is that it can be hard to buy large stocks, if you do not have a large sum of money to start. Let’s say you want to buy a fifty-dollar stock, but don’t have $50. You can buy a fraction of that stock for less money and still gain from it. But, of course, it would help if you had a broker that would allow you to do fractional trading.
Pros and Cons of Fractional buy and hold trading.
The best part of fractional investing is that you can diversify your account with less money involved. Another pro is that you can own any stock, no matter how expensive. One of the cons of this strategy is that you gain less because you only own a stock fraction. Another con of this strategy is that it does not work on all brokers.
Now that you have a complete understanding of the buy and hold trading strategy and why it is one of the most powerful ways to grow your wealth. We have created an FAQ for you so that you can get all your questions answered.
Best Buy and Hold strategy Broker:
M1 Finance (Our Preferred account) Get a $30 bonus for a new M1 Account Here:
M1 can start with as little as $10, and there are no commissions plus fractional shares:
The M1 account is explicitly designed for buy and hold trading. That is why we like them so much for our strategies.
Some other brokers you can use are.
- Interactive Brokers
Buy and Hold Trading Strategies Frequently Asked Questions:
Is buy and hold a good strategy for Crypto?*
The buy and hold strategy helps lower the risk of getting bitcoin at a high price. By buying frequently, you could make sure you buy bitcoins at a different price than before.
Can you use the buy and hold strategy in Forex?*
Forex market buy and hold strategy is the same thing we talked about but in a different market.
How do I get a buy and hold strategy in Reddit?*
Reddit is an online social media platform that allows you to communicate quickly. People also share the buy and hold strategy there. Recently Reddit has made headlines with some of the picks they have made, which could be to watch for your buy and hold positions once excellent Reddit with good info for buy and hold is value investing.
How much money can I make with a buy and hold trading strategy?*
You can make millions of dollars with this strategy. Still, it would be best if you remembered all of the tips and tricks we gave you to make it 100 times easier for success. Ie.) the star principle.
Who should use the buy and hold trading strategy?*
The buy and hold strategy is excellent for beginners who do not understand all the advanced trading methods needed to be a day trader. If you don’t have time to stare at charts all day, then a buy-and-hold strategy would work better for you because you only have to spend a few minutes a month analyzing your portfolio. If you get emotional trading and think it is stressful, then the buy and hold strategy would suit you.
You may also be interested in this guide to forex trading for beginners.
Buy and hold strategy summary and action steps:
The buy and hold trading strategy is one of the best strategies for creating wealth. If you do your research and you stay consistent with the strategy, you truly should have a great deal of success. If you have any questions or comments, please leave them below.
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