Buy-and-Hold Portfolio Strategy: What to Know

A common phrase you may have heard, either online or from a friend, is to “buy and hold” when you invest. But this can be a vague recommendation, leaving you wondering what you should buy and how long to keep assets in your portfolio. The phrase refers to a longstanding investment strategy where you purchase securities, such as shares of a mutual fund, and retain them long-term.

In this article, we’ll explain how this strategy works and explore the types of assets people often use. You’ll also learn who this strategy is typically ideal for and the benefits and risks of implementing it. Finally, we’ll explain how a financial advisor is an invaluable resource for helping you get this philosophy right in practice.

Understanding the Buy-and-Hold Strategy

The buy-and-hold strategy refers to an investing approach where one purchases an asset (or several) and maintains ownership of it for a long period. This can be several years or decades, depending on one’s time horizon and goals. By doing so, a person assumes that, over time, general market appreciation will result in positive returns once they’re ready to sell.

Often, investing is an emotional pursuit. Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, says, “Too often investors watch the 24/7 financial news networks and have a bias toward action — that is, trading. Investment success is more easily achieved by making fewer decisions and practicing buy-and-hold investing.” The buy-and-hold strategy seeks to avoid kneejerk reactions. A person only operates on the confidence that what they own will be worth more later in life, such as when they retire.

There are many different assets that you can buy and hold within your portfolio. Often, the method refers to buying and holding positions in stocks and mutual funds, such as those that track the S&P 500 and foreign markets, as well as own bonds. However, it’s also possible to apply the strategy to real estate, either through properties or real estate investment trusts (REITs) and fixed-income securities, such as bonds.

As mentioned above, investors buy and hold assuming their stake in a security, such as a stock, will appreciate significantly over time. Historically, the idea has held. For example, the S&P 500, a market index that tracks the top 500 largest public companies in the U.S., went from 2,002.28 on September 2, 2014, to 5,528.93 points on September 3, 2024. Per the index, this reflects an annualized return of over ten percent in the past ten years.

Benefits and Risks

Buying and holding securities can be an effective way to generate sustained returns over time. Rather than trying to beat the market, it allows for a more simplistic approach. Additionally, Johnson points out that it “minimizes transaction costs,” which can eat into your returns if you trade too frequently.

However, while the buy-and-hold approach can be highly beneficial, it also has other downsides and risks to consider. First, while it generally minimizes transaction costs, you still must deal with pesky maintenance and trading fees that can compound over time. According to Johnson, “The late Jack Bogle, founder of Vanguard, has referred to this phenomenon as ‘the tyranny of compounding costs.’”

Another risk to consider is that, if you choose the wrong securities to hold, you may not see as high returns. For this reason, it’s key to meet with a financial advisor to ensure that the assets you buy align with your goals, risk tolerance, and time horizon. Additionally, it’s always possible to lose money when you invest, which you should keep in mind at all times.

What Assets People Buy and Hold

While many types of securities may be suitable for the buy-and-hold strategy, some are more efficient and effective choices for investors. Thomas J. Brock, CFA, CPA, an expert contributor at Annuity.org, explains that “the most efficient approach is to utilize low-cost, fund-style vehicles, such as index funds and exchange-traded funds (ETFs)” when you’re “structuring a strategic asset allocation.” This is because the “highly diversified nature of these vehicles is ideal for buy-and-hold investing across many types of asset classes, including domestic stocks, international stocks, investment grade bonds, high-yield bonds, and alternatives,” continues Brock.

Similarly, many espouse the “three-fund portfolio,” a simplistic portfolio construction that typically includes funds in domestic stocks, international stocks, and bonds. Often, investors refer to this strategy as the “Bogleheads” approach, named after John (Jack) Bogle, the founder of Vanguard and one of the initial advocates of the method. While this strategy may be effective for you, we recommend speaking with a financial advisor before committing to it to ensure it aligns with your needs.

Who the Buy-and-Hold Strategy Is Typically For

The buy-and-hold strategy is a long-term one. With this in mind, you should consider your financial goals and how soon you’d like to reach them before using the approach. For instance, if your primary goal is to build wealth for retirement, it may be an optimal choice. However, if you’re saving for a short-term goal, such as a down payment on a house, placing your funds in the market might not be the best option.

Matt Willer, Managing Director of Capital Markets and partner at Phoenix Capital Group Holdings, LLC, recommends the buy-and-hold strategy “for young investors.” With such a long time horizon until retirement, young people can more easily reap the benefits of compound interest and sustained returns. For example, Willer says that by holding an asset such as the SPY, an ETF that tracks the S&P 500, one can “get a low cost, long term, diversified, dollar cost averaged approach to long term capital growth.”

Whether you’re sitting down with a financial advisor or using an automated portfolio management tool (robo-advisor), it’s crucial to keep your goals and time horizon at the top of your mind. This will inform your asset allocation and how long you hold the securities you buy.

Why You Should Meet with a Financial Advisor

Despite the simplistic nature of buy-and-hold investing, working with a financial advisor is essential to ensure you build a portfolio that’s optimal for your goals. After meeting with an expert, you can avoid crucial mistakes and construct an asset allocation that works for you.

Meeting with an advisor goes beyond simply selecting securities to buy, however. Johnson recommends that investors “establish…an Investment Policy Statement (IPS) and follow it.” This is a “written document that clearly sets out a client’s return objectives and risk tolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances,” says Johnson. Beyond simply helping pick out assets to buy, an advisor is crucial in helping you build an overarching strategy that you can reference and follow, only to be changed “when your individual circumstances change,” such as after a “divorce or other unanticipated life change,” Johnson adds.

Finding a high-quality fiduciary advisor is also of key importance. This is because, whether a professional is discretionary or not, you want to hire someone who has your best interest in mind. To find an expert suited to your needs, consider using this free matching tool, which will pair you with a vetted option near you.

Frequently Asked Questions

Does the buy-and-hold strategy work?

The buy-and-hold strategy is a simple and, historically, effective way to see sustained returns over time. This is because it operates on the assumption that the market will naturally grow over many years, which has held true. However, it’s a long-term strategy that mainly benefits those with the time to hold on to their investments.

What is the main advantage of the buy-and-hold strategy?

The key advantage of the buy-and-hold strategy is that it takes the guesswork out of investing. That is, instead of trying to time the market and risking your principal in times of volatility, you ride the wave and, if historical trends continue, realize long-term gains.

Are ETFs good to buy and hold?

ETFs, as both Brock and Willer described earlier in the article, are an efficient security to buy and hold. This is because they are low-cost and provide you with the necessary diversification to see gains over time.