Pros & Cons of A Passive Buy and Hold Strategy

Investing in the stock market can be basically done in two ways, either you got too fast and take huge risks or you be safe and steady. While most of the investors prefer the first one in order to earn huge amounts in a short span of time there are many investors who prefer the latter one. These are the long term investors.

Long-term investor invests with the motto of buying low and selling high. They research in the markets and find undervalued stocks and invest in them with an intent of holding the position for several months or years. They usually research on the basis of the fundamentals of the company and sound management. After all, who would not want to own Reliance Industries Limited today at the prices which were prevailing in the 90’s. Long term investors who have invested a lakh rupee in Reliance in 1990 would surely be a “Crorepati” today.

While this buy and hold is also a low risk investment strategy, there are numerous pros and cons associated with it. It is important to learn about them in detail before implementing this strategy. So, without further ado, let us discuss about the major pros and cons of this buy and hold strategy in detail.

Table of Content

1. Pros of Passive Buy & Hold Strategy
   • Less Hassles
   • It works
   • Based on Cold, Hard facts
   • Great for Taxes
2. Pros of Passive Buy & Hold Strategy
   • Blocks Capital
   • Time
   • Market Crashes

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1. Pros of Passive Buy & Hold Strategy:

Let us take a detailed insight at some of the benefits or pros of passive buy and hold strategy

• Less Hassles: Most of the investors prefer the buy and hold strategy because there are very few hassles when compared to short term or intraday investments and trading. You simply pick a stock based on fundamental analysis and invest a portion of your investment capital in it and that’s it. You simply need to wait now for the prices to rise so that you can square off your position at a higher rate and extract profits. You need not to keep yourself glued to the screen for all day and place frequent trade orders. However, you need to have a strong fundamental analysis for successfully investing. You can also take help of Market Neuron, which provides you a selection of 6-10 stocks based on fundamental analysis to buy and hold.
• It works: It has been proven with time that this investment strategy works most of the time and this is the reason it is considered to be a safer investment option compared to intraday and short-term investments. However, you need to have a proper analysis about the fundamentals of a company before investing in it. As we discussed, all you need is to pick a stock with strong fundamentals, and invets your capital and WAIT.
• It is Based on Cold, Hard facts: Fundamental analysis requires you to have an in-depth analysis about the insights of a company. These insights are usually solid facts which are prominent in nature and not manipulative. Therefore, there are very limited chances of having a wrong decision, provided that you had an expert fundamental analysis.
• Great for Taxes: Last but not the least, the tax incurred on long term capital gains is lower when compared to short term capital gains. Any position that is hold for a period of over an year qualifies as a long term investment and taxed at a more favorable tax rate.

2. Cons of Passive Buy & Hold Strategy:

There are various cons as well, which are associated with buy and hold strategy. Let us discuss about the cons of passive buy and hold strategy.

• Blocks Capital: Passive buy and hold strategy requires you to have your capital invested for long investment horizons, which means that you will not have access to your capital for few months or even years. In case of an emergency, there are chances that you may need to square off your positions with loss because the holdings were sold before the planned time.
• Time: It is obviously a time taking strategy. You need to invest for months or years and there are chances that the stock you selected does not shows the expected movements and ends up being a sluggish one. In such a case, the returns will be lesser than what you expected.
• Market Crashes: You are holding a position for ten years that does not mean that the stock prices are infallible. There are various factors which can led to a market crash which are beyond your planning. The recent outbreak of the Covid-19 pandemic which had a brutal impact on the market is one such instance.

ConclusionBuying and holding is one of the most preferred investment strategies in the market. The investors implementing this strategy do not need to worry about timing the market. Or making decisions based on subjective analysis. However, it must be noted that like all other investment strategies, buy and hold strategy also comes with a set of associated risks. It is therefore recommended to have your risk profile analysis from a certified investment advisor before investing.

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