Buy-and-Hold Investing, Benefits and Risks

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The financial markets of the world have several investment products to choose from. From mutual funds to bonds and equity, all investment products pertain to a certain degree of risk and reward, and nothing can be guaranteed. It’s an all-inclusive effort as several variables come into play, like macro and micro factors, performance history, and any existing performance criterion. One of the critical things that come into the picture is the holding period. People think long holding periods—or Greater Investment Horizons—are mostly beneficial for their investments. The bottom line? We believe in buy-and-hold investing rather than stock trading. Here’s an overview of such a strategy.

What Do We Know About Holding Periods?

The holding period refers to the time or period when the investment is held. Basically, it’s the duration within the purchase and sale of a specific security. A long holding period is when the security is held for more than 12 months. An important thing to know about the holding period is that it helps to evaluate the taxation of capital gains or related losses. Long holding periods usually don’t have an expiration, and rewards are delivered in the form of dividends.

Benefits of Long Holding Periods

Let’s take a quick look at some interesting advantages or perks to having long holding periods for your investments.

Time Equals Growth

The duration of your investment suggests the level of returns and growth as time heals market volatility. The market itself grows as a whole, but strong and successful companies grow beyond the market growth. No matter your investment goal, your success will rely on the period of investment you choose. The numbers speak for themselves—the longer the holding period, the greater returns. Of course, this rings true for robust companies (see here). A short holding period may be considered speculation rather than investing.

Compounding Aids

Compounding is something more of a complex term that is difficult for beginners to grasp in the stock market. In this sense, compounding aids define the overall functionality of the entire investment scenario in the mutual fund platform. In the long term, compounding enables the users to attain substantial rewards as they would begin investing early.

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Diverse Portfolio in the Long Run

Diversifying investment options is a strategy to maximize profits in the long run. As investors get more time to make informed decisions, they can further monitor the existing investments and seek the right options for their existing portfolio.

Making Corrective Actions

As a beginner, you may miss certain technicalities. For example, you may go with investment options that were high on price movement charts. With a long holding period, you will have the opportunity to see if the chart is consistent and, if not, make the right decision. Long holding periods enable the investors to determine the profitability of stocks and other investment options to divide the risk accurately.

Risks Of Long Holding Periods

When we talk about risks related to the holding period, it’s more like the possibility of a better opportunity that an investor might have to give up on. With more duration attached to the investment, the likelihood of missing a more significant attractive opportunity increases.

Emotional Turmoil During Market Highs & Lows

Other than this, long holding periods always carry a certain level of risk concerning the investor’s emotional approach. When markets fall, investors tend to lose their cool and make large withdrawals to reduce their losses. Other than this, the same investors miss out on the opportunities to reinvest when the market rebounds. Such behavior is known as Buy High-Sell Low and is a common reason why investors often receive crippled returns.

Opportunity Cost in Long Holding Periods

Long holding periods can carry a significant opportunity cost. When you purchase an asset for the long term, you are attached to it for a substantial period. Hence, you need to take a disciplined approach towards different investment opportunities. If you have chosen a lagging stock option, maintaining a disciplined approach is truly straining.

The Market Fluctuations

You might have heard that long-held benefits of Investing in stocks are always rewarding. However, this isn’t always the case. Holding an index or a stock for years doesn’t make it immune to market failures. Though we may need a catastrophe to shut down the markets, regular crashes and depressions in the economies often put your stakes at risk.

Conclusion

Overall, long holding periods certainly have some advantages to them. Unlike short-term investments, they have considerable returns. Not just that, but they also improve your long-term goal achievement and cater to effective risk management. You will never find a win-win deal in the capital market, considering the risks. An element of risk is what makes them so lucrative. So, keep your mind open and make suitable long holding investments.

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