When it comes to investing, there are two main types of investors. There are traders who are more drawn towards value trading and then there are the day traders.
These two schools of thought on trading are vastly different and it depends on whether you have the time to play a waiting game or whether you have the time to watch the markets and buy and sell at the opportune time. When it comes to value trading, the buy-and-hold strategy is very popular and here is why.
Value investors want to spend as little money as possible for the highest return on investment. Any investment transaction requires money, and as such, the more transactions an investor makes, the higher the admin fees become.
A buy-and-hold strategy is an attractive option as there are much less transaction fees to pay. Not only do investors save on admin fees, but sales commissions are also kept low.
Due to the fact that the investment stretches over a long period of time, long-term capital gain is applicable. This means that the investor will also pay less on tax as it is less on long-term capital gain than on the short term.
Short-term risks are reduced
Mike Kerley, an experienced fund manager, says that value investing requires a great deal of research and evaluation before stocks are bought. As Janus Henderson Investors explain, the stock selection is based on a number of criteria to ensure a good return on investment. For example, the history of a company is a good indicator of the stability of its growth and will therefore indicate a good investment.
In the short term, if the company goes through a dip, it can be weathered and eventual growth will still be on the cards. It requires that the investor not be swayed by emotional downturns and also suppress biases and the urge to sell when things are looking bad.
Tried and tested method
The buy-and-hold strategy has been a go-to strategy for some of the world’s biggest and most successful investors. This is because it works. Statistics have shown that if you invest in an index-tracking fund like an exchange trading fund, you are bound to outperform 86% of large-cap active fund managers.
The best part about ETFs is that you do not have to spend as much of your money on management fees and commissions. All you need to do is to put your money in the investment and forget about it.
You do not need a financial degree
Stock charts are about as user-friendly as a book written in a language different from your own. The technical terms and jargon of the investment world is complex and can confuse and deter new investors.
Not only that, but timing the market that is as unpredictable as the weather is bound to leave you losing some money along the way. Studies have shown that day traders have to read the market right 74% of the time to beat the index. Buying and holding relies on some research and looking at the overall characteristics of the market, together with future growth possibilities.
It is based on fact
The simple truth about the buy-and-hold strategy is that it relies on facts and numbers. There is not much room for guesswork or the roll of the dice. It is based on balance sheets, income statements and cash flow. The only forecasting that is done is the potential for growth which is much more accurate than the whim of the masses that sway the markets. There is not much room left for imagination and wishful thinking.