Step 1: “Buy-and-Hold” is a passive investment strategy in which an investor buys stocks and holds them for long periods of time, regardless of movements in the market. An investor who uses a “buy-and-hold” strategy selects stocks, and once they are purchased, is not worried about short-term price movements or technical indicators.
Step 2: Conventional investing wisdom tells us that with a long time horizon, stocks generate a higher return than other assets like bonds. But there is debate over whether a buy-and-hold strategy is actually better than an active investment strategy. Both sides have valid arguments. A buy-and-hold strategy has tax benefits, because long-term investments tend to be taxed at a lower rate than short-term investments. But now let’s look at how a more active investing strategy would render greater returns.
Step 3: Look at the picture for this article. The graph represents the performance of Apple’s stock from July of 2005 to the end of 2006. The stock goes from $40 in July of ’05 to $87 in February of ’06. Then it goes back down by July of ’06 and back up to $90 in December. If you were a buy-and-hold investor and bought Apple stock at $40 in July of 2005 and sold it at $90 in December of 2006, you would have made a great profit – more than doubling your money.
Step 4: Now let’s examine what a more active investor might have done (obviously hindsight is 20/20). Ideally, you would have bought the stock at $40. At that point, you must be constantly researching the stock, following its fluctuations, and looking for an opportunity to sell the stock to take some profit. If you were doing this, you might have been able to sell the stock at let’s say $80.
Step 5: Continuing to follow your stock, you would have had the opportunity to buy Apple stock back at around $50, and sold it after it went back up past $85 to $90. This strategy of active investing obviously has the potential to generate much greater returns than the typical buy-and-hold style. * I will not attempt to teach in this article how exactly to know when to buy and when to sell a stock (I have written other articles titled “How to Know When to Buy a Stock” and “How to Know When to Sell a Stock”). But through reading books and practicing yourself, you will be able to create your own investments strategy that best suits your personality and needs.