Guide: buy and hold

If you want to build up assets for your retirement over the long term, you first need a plan for how to invest them. The buy-and-hold strategy is considered to be one of the best. Find out how this approach can help you to make cost-effective, time-saving long-term investments

Inhalt

1. Initial Considerations
2. The buy-and-hold strategy
3. Other strategies
4. Different asset classes
5. With ETFs
6. As the payout draws nearer

Initial considerations

Anyone who invests money on the capital market first needs an investment strategy. As a rule, this is not the same for every investor. Instead, it is determined by the individual investor’s personal investment horizon and investment objective as well as their individual risk tolerance.

Investment objective

The objective that someone pursues with their capital investment may differ from one investor to the next. There are investors who already know that in two or three years they will be using their money to make a major purchase – a car, a holiday home or a new heating system for their home, for example. All or at least most of the money needed for this is available, but it has to be parked somewhere for this short period of time. Here, it is crucial that the money does not suddenly lose a large amount of value before it is needed.

Another possible investment objective is real long-term capital preservation, i.e. the preservation of assets after deducting inflation. In this scenario, the long-term return should at least equal the average inflation rate.

One goal that many investors pursue is to accumulate assets for the time when they have stopped working, i.e. for retirement. In this case, the aim is not only to offset inflation with the investment, but also to generate a return in order to increase the money available.

In addition, there are some capital market participants who focus on generating quick profits by making short-term bets on individual stocks or other securities.

Investment horizon

The investment term also varies according to the different objectives pursued by investors. Anyone who needs their money again in just a few months or after one or two years has a very short investment horizon. An investment term of three to seven years can be referred to as medium-term.

Those who invest their money for ten years or more, on the other hand, have a long-term or very long-term investment horizon. Those who invest their money for more than 15 or 20 years are usually making provision for retirement. In this case, an investor buys a share or another security, an actively managed investment fund or a passively invested exchange-traded fund and then holds this investment for the entire planned investment term.

The importance of the investment horizon based on the example of the Swiss Market Index (SMI)

Every year, Swiss banks update the “return triangle” for the Swiss equity market. This shows the average annual return on a one-off investment in the SMI in the past.

Example: Someone who invested in the SMI at the end of 2002 and held this investment for 20 years until the end of 2022 would have received an average annual return of 5.6%. A particularly interesting fact is that the longest loss period over this stretch of time was only six years. This was the case for people who invested in 2007 – they had to wait until the end of 2013 to make a profit on their investments. In other words, from an investment period of at least six years, investors who made a one-off investment in the SMI in the past always achieved a positive return.

Incidentally, in the case of Germany’s leading index, the DAX, investors had to hold their investment for at least 13 years to be sure of positive growth. The longest loss period for the global equity index MSCI World was 15 years.

Risk tolerance

Risk tolerance is closely linked to the first two points. Those who have a short investment period or only want to park their money temporarily because they will need it again soon should minimise the risk of significant fluctuations in the value of their investments. By contrast, people who are investing for the long term can take greater risks and thus choose investment instruments with higher return opportunities, such as equities.

However, there are also investors who do not tolerate temporary losses well regardless of the term of the investment. They too should structure their financial investments in such a way as to minimise price and value fluctuations. In these cases, highly fluctuating asset classes such as equities should either be avoided or only added to the portfolio in very limited quantities.

The buy-and-hold strategy

These considerations provide initial indications of the investment strategy to be pursued. For investors with a very long horizon, the buy-and-hold strategy may be particularly suitable.

What does “buy and hold” mean?

The basic idea is to buy a security or fund at a certain point in time and then hold it for the entire planned investment period. It is assumed that the investment will increase in value over time due to the growth potential of the underlying market. For this reason, it is part of the investment strategy to hold the investment independently of possible market fluctuations or temporary price losses during the investment term.

But how long exactly should equities or other assets be held with this method? It is impossible to say exactly, but a long investment horizon of at least 10 to 15 years – even longer would be better – is required. In other words, “buy and hold” is particularly suitable for investors who want to grow their assets over the long term. This strategy is therefore in contrast to the quick buying and selling of shares or other financial products.

Known advocates of the buy-and-hold strategy

Numerous well-known and successful investors are regarded as advocates of the buy-and-hold strategy. These include Warren Buffett, one of the most successful and well-known investors of our time, who once said: “Our favourite holding period is forever.”

Two other well-known adherents of this strategy are the US economists Burton Gordon Malkiel and Jeremy Siegel. Malkiel authored the book “A Random Walk Down Wall Street” in 1973, while Siegel followed suit in 1994 with “Stocks for the Long Run”. Both are considered standard works of the buy-and-hold approach. A well-known German advocate is the investment banker and author Gerd Kommer, who published a book entitled “Die Buy-and-Hold Bibel” (“The Buy-and-Hold Bible”) in 2009.

Pros and cons

Since buy and hold is a passive investment strategy, a major advantage is that the fees incurred for the investment are kept low. After all, every purchase and sale of a security incurs costs which reduce the return. In addition, the time that investors have to spend is kept to a minimum as they do not have to constantly monitor their investments. This strategy is also considered to be less risky than many other strategies and its success, which has been proven scientifically on many occasions, is also confirmed by the SMI’s return triangle and the long-term performance of the equity markets in the past.

As easy as buy and hold may seem at first glance, there are also some hurdles when it comes to executing this strategy. Above all, it takes a lot of discipline. After all, a buy-and-hold portfolio can lose a great deal of value in a recession or crisis, such as the recent rapid rise in inflation and the war in Ukraine. For the long-term success of the strategy, it is important to remain invested rather than selling, even in such phases or during a stock market crash. There may also be times when the portfolio lags behind the market. Here, too, it is important to hold one’s nerve rather than panicking and changing the strategy.

What to bear in mind when implementing this strategy

There are a few things that need to be taken into account when putting the buy-and-hold strategy into practice. For example, it is advisable to use a broad selection of different asset classes such as equities and bonds and a large number of individual securities – known in technical jargon as “diversification”. In the case of equities, broad diversification means that the portfolio is spread across many companies from different sectors and regions.

However, anyone who implements this strategy with individual securities must not only ensure sufficient diversification; they also need to research and monitor the selected buy-and-hold equities very intensively, both before investing and while holding the securities. In this respect, actively managed investment funds or exchange-traded funds (ETFs) that track an index such as the MSCI World, the leading US index S&P 500 or the leading Swiss index SMI may be more suitable as part of a buy-and-hold strategy for investors who want to keep the amount of work involved to a minimum.

Regular rebalancing also makes sense with a buy-and-hold approach. Anyone investing in different asset classes as part of this strategy and in different regions or sectors within the asset classes must take into account the fact that the composition of their portfolio changes constantly due to the differing price performance of the individual assets. Experts therefore recommend reviewing the allocation in the portfolio at least once a year and, if necessary, adjusting it in line with the original composition and one’s own investment objectives.

Here’s an example: An investor begins with a split between equities and safe government bonds of 60% to 40%. After one year, however, equities make up 70% of the portfolio because they have performed better, while bonds account for just 30%. However, this no longer corresponds to the investor’s original risk tolerance. As a result, we have to reduce the equity allocation and buy more bonds until the original 60% – 40% split is restored.

In addition, personal risk capacity must also be taken into account here, as it may change. If someone is approaching retirement age, for example, then it may make sense – depending on the individual’s perception of risk – to gradually reduce the risks in the portfolio (more on this below).

Other strategies

Anyone looking for investment strategies on the Internet will find a whole host of other options in addition to the buy-and-hold approach. Some approaches may be used to complement a buy-and-hold strategy, while others may be deployed as an alternative. What works for whom depends on the three factors explained at the outset: investment objective, investment horizon and personal risk tolerance.

Income-oriented strategy

This strategy aims to make investments that generate a steady stream of income. It does so by using dividend-paying or fixed-income securities. This is of particular interest to investors who are dependent on having a constant source of income, such as pensioners who need it in addition to their pension payments. This strategy can be implemented as a buy-and-hold strategy.

Pro-cyclical and counter-cyclical strategies

With a pro-cyclical strategy, investors follow the trend. When prices go up, they buy, and when prices fall, they sell. With a counter-cyclical strategy, the opposite is true. You buy when prices are down and the mood is bad, and sell when the stock market is on a high. Both strategies result in a higher portfolio turnover rate, which in turn means higher trading fees than a buy-and-hold approach. Investors also have to keep a close eye on the market at all times.

Growth and value approaches

A growth approach involves investing in growth companies, i.e. companies that are exhibiting high growth rates. Technology is considered to be a typical growth sector. Value investors, on the other hand, focus primarily on undervalued stocks, i.e. companies whose fundamentals are better than the market values them to be in the price. Both strategies can also be implemented as part of a buy-and-hold approach.

Active versus passive

A passive investment strategy involves investing in an index that tracks an equity or bond market. This means that the investor does not actively select individual securities; instead, they buy ETFs or index funds. This is in contrast to active trading, where an investor or fund manager tries to beat the market by selectively choosing individual stocks.

Day and swing trading

Approaches of this type are among the very short-term trading strategies. In day trading, the investor buys and sells their positions on the same day. Among other things, methods known as technical analysis and chart analysis are used here, although their validity has not been scientifically proven. Swing trading is a special form of trading that is also considered highly speculative. In this technique, investors try to make short-term profits by exploiting price fluctuations.

Buy and hold with different asset classes

What is asset allocation?

Asset allocation is the allocation of money to different asset classes such as equities, bonds, gold, cash or real estate, to name just a few of the most important asset types. The specific breakdown is different for everyone, and is based on their individual investment objective, investment term and risk capacity. While equities offer higher returns in the long term, they are riskier, which translates into greater price fluctuations, referred to in technical jargon as volatility. Safe government bonds, on the other hand, are regarded as relatively stable.

Equities

Equities are securities that securitise an interest in a joint-stock company. Anyone who buys an equity becomes a co-owner of the company in question and benefits from its economic success, which can be reflected in a rising share price or a profit distribution in the form of a dividend. If the company is doing badly, the share price may fall and the investor will suffer a loss. In the worst case, if the company goes bankrupt, the capital invested is lost.

The long-term returns of the most important asset classes

In the past, there has hardly been a better asset class in the long term than equities. Although equity prices can fluctuate sharply in the short term, the major equity indices have always increased in value over a long-term investment horizon.

According to Credit Suisse’s Global Investment Returns Yearbook 2023, equities generated an average return of 6.4% per annum in real terms, i.e. after inflation, on the US equity market between 1900 and 2022. This figure was 1.7% per year for bonds and 0.4% per annum for short-term US treasury bills. Gold generated an average return of 0.76% per annum, which was also significantly behind equities.

Although this shows that equities are particularly well suited for a long-term investment horizon, it should always be borne in mind that past prices are never a reliable indicator of future ones. In other words, there is no guarantee that equities will continue to perform as they have done to date.

Fixed-income securities

Unlike equities, fixed-income securities, also known as “bonds”, are a form of debt capital. Investors make capital available to the issuer, for example a government or a company, and in return they receive regular interest income in the amount of the coupon.

Real estate

Real estate may also be a key component of an asset allocation. Owner-occupied property, for example, is a good long-term addition to a buy-and-hold strategy. Rental properties, on the other hand, offer regular income in the form of rental payments. Alternatives to the direct purchase of real estate are open or closed real estate funds, real estate equities or real estate equity funds.

Gold

Gold can also play an important role in asset allocation. As a small addition to the portfolio – most experts recommend between five and ten percent – this precious metal can limit losses at the portfolio level in particularly difficult times of crisis or a severe stock market crash, as it is then often sought out as a safe haven.

Buy and hold with ETFs

As illustrated above, equities are best suited to a long-term buy-and-hold investment strategy. Index funds or ETFs are the easiest way to implement such an equity investment. Since they passively track an index, they are considered to be very transparent and cost-effective, and anyone who opts for a global equity index automatically has a broad diversification across a number of regions and industries.

In specific terms, there are two options for investors who want to grow their assets for retirement over the long term: they can either make a sizeable, one-off investment in a suitable ETF or use a savings plan. In the latter scenario, they might invest a fixed amount every month, for example. The advantage of this method is that if prices fall, shares are purchased at a lower price and the average entry price falls. This may make it easier to weather crises or stock market crashes. Of course, one-off payments can also be combined with a savings plan.