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Rumors of the demise of 'buy & hold' investing have been greatly exaggerated, to say the least. This strategy is as relevant in the current pandemic market environment as it is in normal times. Stocks have made a strong recovery lately, with the major indexes recouping almost half of their losses after making a bottom on March 23rd. This followed the sharpest market downturn in history, in which stocks lost more than a third of their value after peaking on February 19th. This roller-coaster ride has left many investors wary of the stock market and questioning their long-held investing beliefs, including the virtues of 'buy & hold' investing. On top of this are claims from purveyors of market timing who never tire of reminding us that this investment strategy was no longer relevant to the current uncertain environment. It is important to remember that long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it has ever been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of a 'buy & hold' strategy over any other investing approach. But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are: 1) 'Buy & Hold' Doesn't Mean 'Buy & Forget' Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett. Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well-informed of what is going on with each of their holdings and stay ready to make necessary adjustments as market conditions evolve. More . . . | ||||
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| 2) Don't Fall for the 'Buy What You Know' Mantra Guard against the simplistic beauty of the 'buy what you know' mantra; another one of those skin-deep lessons learned from Warren Buffett's investment style. Adherents of this 'philosophy' load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years. Being familiar with a company's product(s) is a useful, but not necessary, starting point to 'knowing' the stock as an investment opportunity. The decision to buy the company's stock should follow a thorough, due diligence process that gives you a solid appreciation of the company's prospects, competitive position and the proper value of its stock, particularly in the context of the portfolio as a whole. In fact, studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks. 3) Stick with a Plan Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change. I am not suggesting that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the market. For example, we are experiencing an 'engineered' economic downturn at present, whose severity will raise solvency concerns for many companies in industries that are victims of social-distancing policies like airlines, hotels, restaurants, etc. But we know that the unprecedented fiscal and monetary stimulus provides more than sufficient 'bridge' for the economy to bounce back at the other end of this downturn. In other words, if you have a longer holding horizon, it hardly matters whether the shape of the recovery resembles a 'V' or a 'U', i.e., an instant recovery or a slowly unfolding one. What matters is that there will be a recovery and many of these companies will thrive if they have financial wherewithal to withstand the next few months of pain. And you must stay nimble and flexible enough to adjust your positions should your outlook change. Putting It All Together Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. Note that we here at Zacks have been successfully managing a number of long-term investing portfolios that practice such 'buy and hold' investing strategies. All of these long-term portfolios are part of the unique arrangement called Zacks Investor Collection which gives you access to the picks and commentary from all of our long-term portfolios in real time for the next 30 days. Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. Here's another great head start: With your 30-day trial you can download our just-released Special Report, 5 Stocks Set to Double, free. Each is the personal favorite of a Zacks expert to have the best chance to gain +100% and more in the months ahead: Stock #1 - Recent FDA Approval Could Send Shares Soaring Stock #2 - Big Competitive Edge in a White-Hot Industry Stock #3 - Retailer Rides Surge in Online Demand Stock #4 - Financial Juggernaut Thrives on Volatility Stock #5 - Standout Internet Service with Explosive Upside The earlier you get into these stocks the higher their profit potential. Also, the opportunity to download 5 Stocks Set to Double free ends Sunday, May 3. Get started now with Zacks Investor Collection and 5 Stocks Set to Double » Happy Investing,
Sheraz Mian is the Director of Research. He manages the Zacks Equity Research team of analysts and is one of the country's leading analysts of aggregate corporate earnings. He manages the Zacks Focus List and Top 10 portfolios. | ||||
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