5 Reasons To Buy and Hold

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:

  1. 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”.
  2. 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).
  3. 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.
  4. 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.
  5. 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!

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