While I have nothing against active trading and some people make a lot of money doing it, I have found that the active trading style just doesn’t fit me. I prefer to buy and hold high quality stocks that regularly increase their dividends.
Here are five reasons why buy and hold investing works for me:
- As a buy and hold investor, I focus on companies that have been around for a long time and are likely to be around when I want to sell (If I ever sell). I might miss out on the next hot stock, but I am also less likely to be victim of another “tech bust”.
- The small number of trades that I perform each year saves me a lot of money in brokerage fees. Being an active trader would cause these brokerage fees to eat away at my capital. This is called portfolio slippage and is simply a cost of doing business for active traders. (Active traders usually factor this cost into their trade calculations).
- Companies that are typically chosen for buy and hold portfolios are less volatile than the average stock. Due to the lower volatility, there is less chance that a stock in my portfolio will suddenly gap-up or gap-down overnight. This suits my personality and investing style by allowing me to sleep better at night.
- Buying and holding high quality stocks allows for capital gains taxes to be deferred indefinitely(assuming it is not a sheltered retirement account). *It is very important to maintain accurate records of trading activity for taxation purposes.
- Focusing on long term goals helps me to reduce myopic loss aversion, the smaller daily or weekly draw-downs in the market. It has been scientifically proven that people are generally twice as sensitive to losses as they are to gains.
I am sure that there are other reasons why people choose to be long-term investors, but these are the most applicable to me.
Bonus For Dividend Growth Investors
If you are a dividend growth investor, there is an additional bonus to being a buy and hold investor. As the dividend rate continues to rise, your yield on cost will increase as well!