Table of contents:
- 1 Which asset classes are suitable for Buy And Hold?
- 1.1 Eligible financial instruments
- 1.2 What returns can be expected with Buy And Hold?
- 1.3 Performance by asset class 1870 – 2015 (nominal)
- 1.4 Performance by asset class 1870 – 2015 (real)
- 1.5 Performance by asset class 1950 – 2015 (nominal)
- 1.6 Performance by asset class 1950 – 2015 (real)
- 1.7 Buy And Hold in practice
- 1.8 Does the buy and hold strategy still work?
- 1.9 asset allocation
- 1.10 The cost average effect
- 1.11 Buy And Hold with shares
- 1.12 Stock Picking
- 1.13 Buy And Hold with ETFs
- 1.14 Buy And Hold with real estate (REITS)
- 1.15 Buy And Hold Custody Accounts
Buy And Hold is the term used to describe the purchase of assets (shares, real estate, ETFs, gold, etc.) with a long-term time horizon (a few years to decades). It is assumed that no excess returns can be achieved by active buying and selling, which is why followers of the Buy And Hold strategy do not try to beat the market, but rather usually invest at regular intervals to accumulate assets that can be expected to perform positively in the long term.
Which asset classes are suitable for Buy And Hold?
The term Buy And Hold is usually used in connection with equity investments. In principle, however, the strategy can be applied to all asset classes, such as
- Real Estate
- Commodities (precious metals)
Eligible financial instruments
For private asset accumulation with investments on the stock exchange, shares and ETFs are usually suitable, as well as bonds and precious metals such as gold and silver. Real estate can be invested in indirectly with REITs, among other things. An ETF can also be used for bonds and gold/silver.
Structured products, warrants, certificates and the like are not suitable for long-term investments in particular.
The asset classes and securities/financial instruments in which investments are made depend on your personal risk tolerance, investment horizon, expected return, etc.
- Buy and hold means holding assets for the long term.
- The aim is to achieve the market return.
- Shares, ETFs, bonds, precious metals and REITs are suitable for buy and hold.
What returns can be expected with Buy And Hold?
Actives and real estate are the winners
To get an idea of the expected return of an asset class or portfolio, we first take a look at the historical returns of the individual asset classes. In the 2017 study The Rate Of Return On Everything, five economists examined the (global) returns on stocks, bonds and residential real estate from 1870 to 2015.
Performance by asset class 1870 – 2015 (nominal)
Performance by asset class 1870 – 2015 (real)
Performance by asset class 1950 – 2015 (nominal)
Performance by asset class 1950 – 2015 (real)
Buy And Hold in practice
Objectives, strategies and financial instruments
The study quoted above shows that very attractive long-term returns have been achieved with both equity and real estate investments. Although money can also be earned with bonds, it is far less than with shares or real estate.
Investors who rely on Buy And Hold know the long-term return expectations and often pursue the goal of not being better than the long-term average with their own portfolio, but to achieve a return that is close to it.
Does the buy and hold strategy still work?
Of course, past returns are no guarantee for future returns. However, as a rough guide, the information is very helpful and it can be assumed that in the long run, returns similar to those in the past can be expected.
On the Internet you can sometimes read/hear statements like: “Buy And Hold no longer works”. Such statements often refer to long-term investments in individual shares (stock picking). However, whether or not outperformance can be achieved through stock picking is a completely different question. In addition, an investment strategy based on Buy And Hold can also be implemented with broadly diversified passive funds (ETFs) and in various asset classes. A blanket statement like the one above is therefore meaningless.
In addition to absolute returns, volatility or the maximum drawdown that can be expected in the meantime plays an important role for investors.
Compared to bonds and real estate, equities are relatively volatile. To smooth the overall performance curve or reduce the volatility of their own portfolio, investors therefore often invest in different asset classes. The cost average effect also comes into play through regular investment.
Asset allocation is the division of the invested capital into different asset classes. Buy And Hold can probably be seen as an investment philosophy rather than a real investment strategy. For a concrete strategy, it is important to take a detailed look at asset allocation, taking into account your own investment horizon and personal risk appetite.
In reality, you will encounter, for example, investor A who is 100% invested in equities, and investor B who holds, for example, 60% bonds, 10% gold, 20% equities and 10% cash. Investor A and Investor B certainly have different risk appetites, but they could both claim that they have a buy and hold strategy.
The cost average effect
Regularly investing (e.g. monthly, semi-annually or annually) means that shares or other assets are bought at different prices. If the stock market has just fallen by 50%, you will receive significantly more shares for the same amount than if you buy at an all-time high. In the long run, buying at different price levels results in an average value. This procedure is known as cost averaging or cost average effect.
Here, too, one sometimes hears statements such as: “Cost average does not work” or similar. What is usually meant by this is that it is better to invest a sum of 1 million euros in full today, for example, than to spread it over the next 5 years on a monthly basis.
This argumentation, however, completely misses the reality and mostly comes from theorists who are far away from practice. The reality of the vast majority of private investors is that a part of their income is saved and available for investment, so that regular investment automatically creates a cost average effect.
Equities are very well suited for long-term asset accumulation. Particularly for investors with a long-term time horizon, it must even be said that equities as an asset class are one of the safest investment instruments, even if the vernacular often says otherwise, especially in this country. Whether all or only a small part of your assets are invested in equities is a question of your personal risk tolerance and investment horizon, as equities are relatively volatile and you have to expect price declines in the meantime.
The question also arises as to how broadly diversified the investment should be. For private investors with the appropriate knowledge, experience and enjoyment/interest, individual stocks, sectors or countries can be over- or underweighted.
Those who do not have the time or inclination to acquire the relevant knowledge and simply want to participate in the positive return expectations of the equity markets in the long term can invest broadly diversified with ETFs (e.g. on indices such as the MSCI World or the S&P 500).
Stock picking refers to the targeted investment in individual stocks with the aim of achieving an excess return. Instead of simply picking stocks on a gut feeling, a clear strategy should be pursued.
There are some well-known investment strategies that rely on stock picking. The objectives of each strategy are different. On the subject of stock picking, as well as on some stock picking strategies, you can find more information on our website in the following articles:
- Stock Picking
- Growth Investing
- Value Investing
- Dogs Of The Dow
Buy And Hold with ETFs
ETFs have become as popular as equities and offer private investors the opportunity to invest at extremely low cost and with a very broad diversification. If you don’t enjoy following the ups and downs of the stock markets and don’t want to worry about the best investment strategy, you can simply select one or a few ETFs and invest in them on a regular basis. With ETF savings plans, this can even be automated, so that a fixed amount is invested in the portfolio every month.
ETFs are therefore an ideal instrument for buy and hold investors alongside shares. Those who do not want to invest 100% of their capital in the stock markets can also invest in gold and bonds using ETFs, or in real estate, with so-called REIT-ETFs.
Buy And Hold with real estate (REITS)
Real estate is an asset class that certainly offers attractive returns for private investors. This does not mean owning your own home, but investing in rented property. Instead of buying and renting property yourself, it is possible to invest in REITs (Real Estate Investement Trust) on the stock exchange. REITs are companies that own and manage real estate, are tax-exempt at company level and distribute a large proportion of profits.
In addition to individual REITs, diversified investments in REITs can also be made with REIT-ETFs. As real estate is a long-term investment per se, it is very suitable for buy and hold investors.
Buy And Hold Custody Accounts
Those who have decided to invest with a long-term investment horizon (10+ years) – in other words, to go for buy and hold – have a number of different options. In order to really be successful in the long term, a clearly defined strategy should be pursued.
How the exact asset allocation and portfolio allocation looks like always depends on your personal risk tolerance and investment horizon. In addition to pure equity investments, long-term investments in precious metals and bonds are a popular instrument for diversifying your own portfolio even more broadly and reducing volatility.
A buy and hold portfolio that invests in various asset classes with ETFs is for example Ray Dalio’s All Weather Portfolio.
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