Buy-and-hold is a long-term investment strategy where an investor purchases financial assets and keeps them for an extended period while ignoring short-term market fluctuations.
Explanation of the strategy
Elephants who adopt a buy-and-hold strategy purchase equities or exchange-traded funds and keep them in their portfolios for years or decades. The method requires the investor to ignore short-term price drops and daily market news. Elephants using this approach do not engage in frequent trading. They maintain their positions through periods of high market volatility.
Active traders buy and sell assets frequently to generate short-term profits from price movements. Buy-and-hold investors incur lower transaction costs because they trade less frequently. They also defer capital gains taxes in jurisdictions that tax realized investment profits. This tax deferral allows the invested capital to compound over time without immediate deductions for trading taxes.
The strategy assumes that broad financial markets generate positive returns over a long investment horizon. Buy-and-hold investors accept that their portfolio value will decline during bear markets. They do not attempt to time the market by selling assets before a crash and buying them back at lower prices. Market timing is difficult to execute consistently, so these investors prefer to stay fully invested.
Example
Suppose an Elephant purchases 100 shares of a multinational agricultural company at $50 per share. Over the next five years, the global stock market experiences a severe downturn. The share price of the agricultural company drops to $30. Instead of selling the shares to prevent further losses, the Elephant holds the position. The investor understands that the drop is part of a normal market cycle. By year ten, the market recovers and the company expands its international operations. The share price rises to $120. The Elephant benefits from the long-term price appreciation because they ignored the temporary decline.