Buy and hold strategy explained
Guide Summary
- Buy and hold is a passive, long-term strategy based on the belief that markets grow over time.
- It minimises costs and emotional decision-making but still requires regular reviews and a diversified approach.
- Patience, discipline, and tax efficiency are key to making the most of this strategy in the UK.
What Is buy and hold?
Buy and hold is a passive investment strategy. It involves purchasing an investment and holding it over the long term, often years or decades, with minimal trading.
The rationale is based on historical data showing that markets tend to rise over time despite short-term volatility.
Rather than reacting to daily market news or price swings, buy and hold investors focus on the long-term potential of their investments, allowing compounding returns and capital appreciation to work in their favour.
Advantages of a buy and hold strategy
- Compounding Returns: Over time, reinvested dividends and interest can significantly increase the total value of an investment.
- Lower Costs: Because it involves less buying and selling, this strategy reduces trading fees and potentially lowers capital gains tax liabilities in taxable accounts.
- Less Emotional Investing: A long-term view helps investors avoid reactive decision making in response to market dips or economic news.
- Tax Efficiency: In the UK, assets held longer than a year may be subject to more favourable capital gains treatment, especially when held within tax-efficient wrappers such as ISAs or pensions.
Risks of a buy and hold strategy
While buy and hold is relatively simple and historically effective, it’s not without risk:
- Market Downturns: Bad market days can still negatively affect portfolio values, particularly if they occur near an investor's time of withdrawal.
- Company or Sector Risk: Holding individual stocks over long periods can expose you to company-specific risks such as poor management or disruptive competition.
- Inflation Risk: Over decades, inflation can erode real returns if your investments don’t grow faster than inflation.
- Behavioural Risk: The strategy requires patience and discipline, emotional decisions can undermine its effectiveness.
How to build a buy and hold strategy
- Set Clear Objectives
Determine your financial goals, risk tolerance, and time horizon. Buy and hold works best with long-term objectives such as retirement planning.
- Choose a Diversified Portfolio
Instead of focusing on single shares, many investors use diversified instruments like index funds or ETFs to spread risk across different sectors or markets.
- Use Tax-Efficient Accounts
In the UK, Stocks and Shares ISAs or Self-Invested Personal Pensions (SIPPs) allow your investments to grow free from Capital Gains Tax and dividend income won’t count towards your Personal Allowance.
- Automate Where Possible
Regularly investing a fixed amount (pound-cost averaging) can smooth out market volatility over time and build a habit of disciplined investing.
- Review, But Don’t Overreact
Check your portfolio annually or after major life changes, but avoid frequent trading. Adjust only if your goals or circumstances change.
Buy and hold strategy summary
The buy and hold strategy is a cornerstone of long-term investing. Its simplicity and historical success make it especially appealing for new investors looking to build wealth over time. While not without risks, its disciplined, passive nature aligns well with long-term financial goals.
In the next guide, we’ll compare two distinct investing styles: defensive and aggressive strategies, helping you understand how different approaches to risk and return can shape your investment journey.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. Diversifying means spreading your investments across different sectors, countries and asset classes.
