Buy-And-Hold Investing: Forever?

In the era of digital trading platforms and zero-commission brokers, investors have never had it easier. With tools at our fingertips and little to no fees, we have the luxury of making stock market investments efficiently. However, with all these resources, a staggering number of both novice retail and seasoned professional investors still fall short of outperforming passive benchmarks. How do we flip the script and bolster our investment returns? Is the long-touted buy-and-hold investing approach, exemplified by legends like Warren Buffett, our ticket to consistent success? And, if we take this idea to its zenith, is a buy-and-hold-FOREVER strategy feasible for the average individual investor?

Why Do Buy-and-Hold Investing Strategies Work?

1. Reduction in Costs: A buy-and-hold method drastically cuts down on transaction costs and management fees, keeping more money in your pocket. By making very few transactions, the associated costs are almost eliminated. And, since no transactions are being made, there is no requirement to pay for investment management.
2. Psychological Stability: A buy-and-hold outlook reduces the chances of making rash decisions based on market volatility and personal biases. Reducing the impact that emotions have on our portfolio will enhance returns and provide greater financial peace of mind.
3. Mindful Investing: A buy-and-hold strategy forces us to ponder more profoundly about our investment choices, ensuring better due diligence. Investors will carefully consider each life-long investment they make.
4. Reducing Taxes: Profitable trades associate with capital gains taxes. But when investors employ a buy-and-hold approach, they will never pay capital gains tax.

The Profit Mechanisms of Buy-and-Hold Investors

When we observe stalwarts like Warren Buffett, it’s evident that some buy-and-hold investors genuinely intend never to part with their investments. This then begs the question; how do these forever-holders reap profits? And, what’s the incentive behind a strategy if they can’t substantially realize the economic benefits?

• Dividends: One key avenue is through dividends. By holding onto stocks of companies that consistently declare dividends, investors receive a steady income without having to sell any shares.
• Philanthropy: Since donating appreciated securities are exempt from capital gains tax, buy-and-hold investors reap significant tax advantages while bolstering their charitable legacy.
• Generational Wealth: Many successful investors accumulate more capital then they require to support their own material consumption. These investors can therefore endow the next generation with significant financial advantages.

Teaching Buy-and-Hold to the Next Generation

If we employ a buy-and-hold forever approach to investing, and plan to create a financial legacy that future generations will benefit form, what are the key attributes that we should pass on?

• Mental Resilience: Train the next generation on the emotional rigors of staying put during both booms and busts. The future is unpredictable; foresight is good, but preparation is better.
• Choosing Wisely: Pick top-notch investments you trust for the long-haul. Discourage their tendency to buy-and-sell.
• Steady Returns: Sturdy blue-chip stocks, expansive market stock index funds, and prime real estate stand out as long-term investment beacons for the buy-and-hold investor. Caution the next generation about following the latest investment trends which often pitched by salespeople and carry high fees.

Times to Consider Selling

While the buy-and-hold strategy sounds ideal, life presents scenarios that mandate liquidation:

• Inevitable Capital Gains: Situations like company buyouts, passing away, or the 21-year rule may necessitate cashing out.
• Tax Benefits: Liquidating the largest unrealized capital losses during times when capital gains are due can balance out the taxes due. Harvest the largest unrealized losses during years when you’re forced to realized capital gains for the reasons mentioned above.
• Estate Planning: Try to avoid selling at death by Incorporating life insurance into your estate plans. This will shield your heirs from selling assets to meet capital gains tax obligations.
• Philanthropy: Donating highly appreciated stocks can be a smart move for making charitable contributions. Appreciated securities are exempt from capital gains tax when they are donated to charity.

At its core, the extreme buy-and-hold perspective compels us to introspect on the essence of investing. Are we chasing numbers, or is there a deeper purpose?

Buy-and-Hold Investing: Generational Wealth

Creating generational wealth transcends sheer monetary value—it’s about crafting a legacy. A middle-class family can sow the seeds of generational affluence by simple habits: living below their means, saving judiciously, and allowing their portfolio to burgeon over decades. This philosophy, passed on, can usher in compounded returns for generations.

Conversely, an entrepreneur might strike gold with a venture but may leave the subsequent generation ill-equipped to manage this sudden wealth. Without the right tools or ethos, this fortune can dwindle rapidly.

Handing down a wealth management methodology is vastly more crucial than bequeathing vast sums of money. Entrusting substantial capital without the acumen to handle it might be setting up the next generation for failure rather than success.

Each week, we send a free newsletter to our subscribers. In it, we provide an update on the past week’s financial headlines, a table of important rates, and a hot stock tip.