How smart do you think you are? Do you think you’re smarter than the financial market?
For as long as investments have existed, more or less skilled investors and traders have tried to read the signs of a potential gain. This translates into being faster than others at spotting a valuable but still undervalued asset (or the opposite).
Some theorize this is only possible in isolated cases and the best way to grow your investments isn’t to try to beat the market but to go along with it.
Buy-and-hold (also called "position trading") is a passive investment strategy involving holding long-term purchased financial or non-financial assets, despite short-term volatility.
If you pursue such a strategy, you must have tremendous confidence in the assets purchased and the market itself. The idea is that profits come from the initial asset appreciation since the portfolio wouldn’t be adjusted to cope with price drops or chase market opportunities.
This may sound idealistic or surreal, but there’s data to support these theories.
Is Buy-and-Hold better Than Investing?
However, let's start by saying that buy-and-hold is only for some. While it’s true that the overall market trend is towards growth, not taking advantage of volatility to compensate for losses or increase profits makes it slow.
Buy-and-hold works better for individuals with a lower risk appetite and a time horizon measurable in years or decades.
This undoubtedly narrows down the audience.
But — for those who remain — is buy-and-hold better than adopting an active trading approach?
Let's consider the stock market. S&P 500 was born in 1957. Since then, the average annual return has been 10.7% (14.7%, considering only the last decade).
This goes in the direction of those agreeing with the Efficient Market Hypothesis (EMH), which states the price of securities already contains all available information.
Therefore, it contrasts with the trader who tries to beat the market by looking for discrepancies between the price and value of a security.
Drawbacks and criticisms.
Although this approach can make it much easier for investors with less experience or the ability to constantly monitor the evolution of the financial markets to enter the trading arena, there are a few crucial considerations to make:
- The first — also by importance — is that timing is critical. Some of the most significant movements, upwards and downwards, typically occur within a few days or even hours. Therefore, buying or selling assets at the wrong time can result in significant yield differences, even over the long term.
- All investment strategies designed to limit risk have the missed opportunity in common to generate significant returns when the market is growing fast.
- Although the overall trend toward capital appreciation makes it possible to overcome periods of uncertainty in the long term, these can still partially undermine overall performance.
Indeed, it only takes one negative return year every five to cancel out the compound interest gained in the previous ones.
Thus, if the expected average yearly return is 10%, the actual one may differ.
- While some lucky investment choices can ride the market timing wave and realize large profits in the short term, buy-and-hold tends to provide better performance long run. Of course, this point is controversial; in both cases, one should discern the goodness of the decisions made.
- It reduces the risk of portfolio management mistakes, making it suitable for novice investors (provided that the initial asset allocation and market entry timing are correctly done).
- A further advantage for less experienced investors is avoiding behavioral bias and emotional trading turning into poor decision-making.
- A passive investment approach reduces investment fees and operational costs.
Examples of Buy-and-Hold Investing
Rock solid assets are critical to the success of a buy-and-hold strategy. Beyond the performance of the S&P 500 since 1957 (mentioned above), an excellent example of buy-and-hold is Bitcoin.
Almost ten years after its launch, its value has increased exponentially.
All the founding principles mentioned in the article seem to apply to the history of the Crypto Queen:
- Those who bought Bitcoin nine years ago benefited from a sustained appreciation;
- Not surrendering to the psychological pressure to sell during bear markets allowed investors to overcome the (even drastic) turbulences.
- Not exploiting the peaks may have compromised the ability to realize significant profits.
- The above only applies to those who entered in the early years or during market corrections.
Thus, data and case studies confirm that buy-and-hold is valid as long as the asset selection and the market timing entry are favorable.
Peccala vs. Buy-and-Hold
So far, Peccala has proven to be more profitable than buy-and-hold, although the real advantages of buy-and-hold strategies are long-term.
Still, Peccala offers similar advantages. Those who buy Peccala Tokens, indeed, don't have to constantly monitor their investments or worry too much about temporary fluctuations.
But where Peccala is actually better than buy and hold is for the timing.
Peccala can perform equally well in bear markets or bullish phases and make money in a volatile market with large fluctuations as well as in a more stable one.
That's because Peccala's algorithms trade derivatives when they detect a defined trend, be it a downtrend or uptrend.
For investors, this is a considerable advantage, limiting the disadvantages of a non-optimal market entry.
Join our waitlist and see Peccala for yourself!