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Investing strategies: How buy and hold can beat trading

For one, you’ll save money on fees and you could pay a lower capital gain tax with this strategy.

Buy-and-hold is a great long-term strategy that comes with many advantages as opposed to frequent trading. That’s because it’s incredibly hard to time the market and pick the price tops and bottoms. Plus, you won’t pay fees for multiple transactions and could save yourself some frayed nerves from watching short-term volatility.

What is the buy-and-hold strategy?

Buy-and-hold is an investment strategy in which the investor buys the stock — or any other financial instrument — with the intention of holding it long term regardless of short-term price fluctuations. This strategy is popular with cryptocurrency investors, which is also known as “hodling”.

In buy-and-hold, investors typically buy financial instruments they believe will appreciate over time, often time-tested companies with long track records. Also, they generally don’t try to time the market or sell high with the intention of buying back low. This strategy is a form of passive management recommended by Warren Buffett, Jack Bogle and Peter Lynch.

Stocks and funds to look at

We don’t know what will happen in the future, so we’ll look at past examples where a buy-and-hold strategy has made some investors rich.

Company/TickerIPO dateIPO priceEarly 2021 value if you’d invested $10,000 investment at the IPO price
Tesla/TSLAJune 2010$17$529,410
Alphabet/GOOGAugust 2004$85$299,050
Netflix/NFLXMay 2002$15$394,660

The Direxion Daily Semiconductor Bull 3x Shares (SOXL) is a buy-and-hold ETF to consider. It’s an ETF that tracks semiconductors and is triple-leveraged, meaning it moves three times more than the price of all the stocks in the ETF. If you bought $10,000 worth of shares at the lowest 2011 price, your investment would now be worth $15,950,000.

Risk and rewards

The main risk of a buy-and-hold strategy lies in the company you invest in. If it goes bankrupt, you could lose all of your investment.

Luckily, this rarely happens overnight, so you would likely see the red flags long before it happens. Large, established companies do go away, but not overnight. This can give you more than enough time to sell your stock and pick another one. Likewise, the stock price may go down, but the bottom won’t fall out overnight.

The reward comes when the stock makes gains over time. Beyond this obvious reward, you’ll also save money on trading fees. Buying and holding means you only pay fees once to buy the share and then a second time to sell them.

Another benefit is that you get to pay a lower capital gain tax if you hold a stock longer than a year.

How to use the buy-and-hold strategy

  1. Do your research. Use a stock screener to find the right stock or ETF for your portfolio. With a stock screener you can select the market cap, dividend yield, sector and more.
  2. Open an account. When you find a stock or an ETF that you strongly believe will perform well in the future, you’ll need to open an account to buy it. If you don’t have an investment account, compare online brokers.
  3. Buy the stock. As soon as your account is open and funded, you can go ahead and buy the stock you want.

Compare trading platforms

For the buy and hold strategy, you’ll need a broker that doesn’t charge inactivity fees because it’s implied you won’t trade often. Most brokers today don’t charge such fees, but make sure to read the fine print and avoid surprises.

Name Product Asset types Option trade fee Annual fee Signup bonus
M1 Finance
Stocks
$0
0%
Free 1-year trial of M1 Plus
when you sign up for M1 Finance
Invest in your favorite stocks or in curated portfolios with automatic rebalancing.
SoFi Invest
Stocks, ETFs, Cryptocurrency
N/A
0%
Get one free stock worth up to $1,000
Open an account
A free way to invest in most equities.
TradeStation
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency
$0 + $0.50/contract
$0 per month
$10 of crypto
Open an account with access to crypto
A platform built for all kinds of traders and all styles of trading
Robinhood
Stocks, Options, ETFs, Cryptocurrency
$0
0%
Free stock (chosen randomly with a value anywhere between $2.50 and $200)
Sign up using the "go to site" link
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
Stash Invest
Stocks, ETFs
$0
$1 per month
$5
Add at least $5 to your Invest account
Stash is more than an investment app. You’ll have access to tools that can help you become a confident investor.
Public
Stocks, ETFs, Cryptocurrency
N/A
$0 per month
Download and sign up with Public.com; approved accounts receive a free stock slice worth up to $300, selected from 9 popular stocks.
Open an account
Commission-free trading in stocks and ETFs with a social networking twist.
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Compare up to 4 providers

*Signup bonus information updated weekly.

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

Bottom line

Buy-and-hold is a solid long-term investment strategy. You don’t have to do a lot of research to see that it works — simply check any price chart of successful companies and see how it performed in the past. Despite short-term volatility, great stocks will usually outperform in the long run.

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