Investing Strategy - Part I

Buy and Hold

The most basic strategy for novice investors (and serious ones also) is a strategy of buy and hold. Essentially this means that you're going to find a good stock (usually through a thorough fundamental analysis) and then you buy it to hold for the long term (defined here as 5 years or more).

Buy and hold is only effective when the stocks are well researched and then are monitored on a regular basis. This is not buy and forget. Every position in your portfolio should be re-examined at least every six months. This doesn't need to be the same as the initial investigation, you should just simply be looking to make sure that nothing has really changed since you bought the stock in the first place. The changes in both Enron and Lucent, among the multitude of poor performers from the last few years, were telegraphed more then a year before the collapse. A regular re-examination of the fundamentals (and the news) would have kept you out of those stocks during their final respective collapse.

Why would someone want to use a buy and hold strategy? After all, it means that there are going to be times when you're holding the stock as it's declining in price.

The idea of the buy and hold is that quality companies will always perform well over the long term. A 20% one year decline isn't really all too important if over the course of five years your average annualized return has been running around 15%. Over the long term, you should really be concerned with your overall return, not a one-year return that may not be representative of the quality of the company.

Buy and hold is one of the best strategies to use for the core portion of your portfolio. Just remember, it is buy and hold, not buy and forget. Keep vigilant with your stocks.