Why Buy and Hold Isn’t the King Anymore (2024): Quick Overview (2024)

The stock market is entering into a new era, and it’s evolving faster than ever.

We’re experiencing exponential growth in the market – fueled by a new age of investors jumping into trading, consumers continuously increasing the ceiling of demand, and technology flourishing.

This created a monster-sized bull market in 2021, with volatility spicing things up all the time – increasing risk, which lends the possibility of very high returns in the short term.

Sounds kind of exciting to jump into, right? And brokerages make it pretty easy to do so nowadays; offering apps that allow you to create a brokerage account within minutes, and start investing just seconds after with zero commission fees.

Let’s dive deeper into why one of the most tried and true strategies, if not the most tried and true, has been slowly pushed aside in wake of modern investors entering the market.

What Makes Buy-and-Hold a Good Strategy?

Let’s be honest, buy-and-hold is not the most engaging or exciting investment strategy, as it can take a while to see results. The catch is, however, that’s exactly what makes it successful, patience. Over the long term in the market, good things come with time.

Buy-and-hold is synonymous with value investing, which is what Warren Buffet does. He holds onto a position until his grandchildren have children. The reason why this is effective in the long term is because in theory, the stock market will always be on the rise. Relatively short-term setbacks will happen, 2008 can even be considered a short-term setback (even though its effects were seen years after), but the market will always go back up.

Why?

The stock market will always increase in value as consumer demand increases. And with the population growing all the time, demand is constantly on the rise. Companies are also evolving, and they’re evolving quickly. Sometimes this bodes well for the share price of a company, to expand, change leadership (for example), but sometimes this causes the share price to plummet temporarily – opening up the opportunity for investors to jump in and reap the benefits of short term volatility.

So while buy-and-hold is tried and true, and is still effective, it doesn’t capture the great potential that the volatile, short term markets have.

The Stock Market of Today is Different

All that glitters is not gold, though. The expansion of the market can be exciting, and lend fruitful opportunities for investment, but we need to pay attention to what the market is being built on. We also need to ask ourselves, is the growth in the market sustainable?

Unfortunately, through greed and frankly just lack of attention, our markets are sometimes built on inflated bubbles. We saw one of these bubbles pop in 2008, when we discovered the hard way that the market wasn’t standing on cement pillars, but instead, walking on stilts. Some say that’s exactly what is happening in 2023.

Expansion of the market and lower interest rates can cause companies to want to overborrow, increasing debt, creating more attack vectors for the bear to bite into. But is this necessarily a bad thing? Doesn’t risk equal reward?

One of the chief reasons buy-and-hold isn’t king anymore is due to the new, more extreme conditions in the market. It’s riskier, and the effect of volatility is higher than ever. And in this jungle of volatility and risk, it makes it easier to make a buck with an active, short term strategy (harnessing the power of high volatility).

This makes a passive strategy less reliable because investors are too on edge to buy and hold when market fear is high. As a result, strategies like swing trading and day trading are being exercised more and more to capitalize on large, short term gains.

Day trading is exciting, but it can be really intense, and require continuous attention throughout the day, which might not fit into the average working class schedule.

Swing trading is part of the strategy TTA employs, because it’s easier to carry out when you have a full-time job (so long as you have a trusted alert system), and you can still capture substantial profits in seesaw markets.

Investment Returns Are Not What They Used to Be

When you compare how many days the stock market had a percent gain of more than 1% in a single day, even 2%, the number of days per decade since the 1930s are relatively the same as they are now. So why do market movements feel different now than they used to? It’s because a 1 – 2% change in 1935 is monumentally different from a 1 – 2% change today, due to the growth in size of the various indexes. Back then, this increased the potential for larger profits.

How?

If the size of the market indexes have changed (increased), this means that if the percent change is kept constant, the amount of points will increase. For instance, 50 years ago, in 1972, the S&P was just over 100 points. Now, as of January 2022, the S&P is over 4,500 points. So, a change of one point in 1972 would constitute a 1% shift, while today, a change of one point represents a 0.02% change.

All of this is to say, investment returns just aren’t the same as they used to be.

Why Buy and Hold Doesn’t Do the Trick for Modern Investors

Modern investors should be considered an entirely different species of investor compared to older generations of traders. Strategies are different, trading software and interface preferences are way different (e.g. simplistic, clean interfaces like Robinhood and Acorns), the sectors they choose to invest in have evolved (e.g. utility stocks used to be a lot more popular, now biotech may be a more attractive choice). This is what we mean by a new generation entering, and changing the market.

Trading software before a lot of these newer brokerages opened used to have interfaces that were more complex and not as user friendly, making them confusing to navigate. Moreover, there were trade commissions you had to pay after every trade you placed. Robinhood, for example, came in and made a clean, easy to use interface, and did away with trade commissions. This helped flatten the learning curve that used to prevent younger investors from entering the market.

Welcome, stock market, to the new wave of investors! This new wave encapsulates millennials and gen Z that are being ingrained with an inherent expectation for things to happen faster due to the progression of technology. Technology has made things happen so much faster, like sending a text versus a letter, for example.

This has changed how modern investors trade because of the expectation for things to happen faster, and this is reflected in their stock market strategies that have changed to be more aggressive, and short-term. Compared to watching long-term investments taking forever to grow, especially after recovering from a recession.

So why not use short-term strategies if you don’t have as much to lose? Those in younger generations typically can have higher tolerances to risk due to, perhaps, not having children, mortgage payments, etc. If you’re fresh out of college, single, and have a well paying job, why not throw some extra cash at some investments? This is now becoming a common trend, as more young people are investing than ever before.

This has become the choice of modern, more risk tolerant investors, because all the money that would be allocated towards long-term, buy-and-hold investments, gets tied up. Which, in turn, means that you have less to spend on other investments.

Incorporating an Active Element to Your Portfolio

We’ve talked about long-term and short-term strategies here so far, but we haven’t touched on how that’s reflected in a portfolio. Less aggressive portfolio allocations are going to have more conservative positions, like more bonds (both corporate and government) versus a more aggressive strategy that would have more large and small company stocks.

Small company stocks can create a fire of volatility that can lend some pretty impressive gains in a relatively short period of time, especially compared to buy-and-hold positions. This is because smaller companies are less developed, and have more room to grow and evolve than well established, colossal companies.

So if you want to build a more aggressive portfolio, adopt more small cap stocks and less bonds. International stocks are also a good, active element to add to an aggressive portfolio, perhaps allocating anywhere from 15 – 20%, and small caps being around the same allocation. Then it’d be a good idea to add some securities that serve as a backbone. These can be large cap stocks, real estate, and commodities like gold.

In addition to having (and building) an aggressive portfolio, you can also actively swing trade to potentially scoop up even more profit in the short-term.

As we mentioned earlier, TTA adopts a swing trading strategy, and we send options trading alerts that indicate when we buy and sell positions in our portfolio. They come via text, which helps make it pretty convenient to follow our moves.

Conclusion

In essence, buy-and-hold is not the king anymore. It still has a place in a modern investors portfolio, but newer strategies are being utilized to capture profits from the increased volatility of the market. The market is more dynamic than ever, and investors will miss out on gains from shorter term movements if they continue to buy-and-hold.

When you choose a buy-and-hold strategy, you have less capital for shorter term investments, there is typically slow growth in buy-and-holds (especially when waiting for a market to recover after a crash). Additionally, modern tech has helped make investing more accessible to younger, more risk tolerant investors, which are typically more interested in more active positions.

And again, all of this isn’t to say buy-and-hold is ineffective, or shouldn’t be used. In fact, it should be used, and it’s largely still effective. It’s just that now, newer generations are starting to trade in the market, plus, the market is much more volatile compared to how it was decades ago. As a result, we’re seeing a shift in the adoption of strategies to capture those opportunities to earn a greater profit.

Is Buy-and-Hold Still a Good Strategy? FAQs

What Exactly is a Buy-and-Hold Strategy?

Essentially, buy-and-hold is literally, buying, and holding a stock. The “holding” part typically means you’re going to keep the stock for some time, namely, years or even decades. This strategy is effective in that it captures profits by following the slow, continuous growth of the market.

When you look at the market’s movements on a shorter term scale, it could be going up or down, but when you look at the “all time” charts of the market, it’s been trending up over time. This is due to expansion and increased demand as we had touched on above. Buy-and-hold allows you to weather market crashes, short-term swings, etcetera, because your positions are going to be held well beyond short, intraday dips or temporary market corrections.

Is Buy-and-Hold Still an Effective Strategy?

Buy-and-hold is absolutely still a good strategy – and it will be for a long time due to what we’ve discussed above: ever growing population, thus ever increasing demand. Drastic, long-term changes in demand and population are unlikely to occur for the foreseeable future, and until we see that, we can comfortably rely on buy-and-hold still being a good strategy.

Keep in mind that you can always adopt a buy-and-hold strategy in tandem with your other strategies, like swing trading.

Does it Cost Money to Hold a Stock?

No, it does not cost money to own a stock. The only additional charges associated with owning stocks are the trade commissions when you buy and sell the position – but it’s common nowadays to see brokerages not charge fees anymore.

If, however, you invest through something like Acorns, which automatically invests your money based on your aversion to risk, and sells positions for you if you want to pull money out – you need to pay monthly for that. So if you hold positions for several years, you could end up paying a decent amount for holding your positions. But that’s the cost of the service, not the cost of holding a stock.

What Types of Stocks Would Be Good to Buy and Hold?

The best stocks to buy and hold are the ones with companies that are going to be around for the long haul.

Remember that buy-and-hold is about patience, its value investing, so you need to hold onto those positions for a minimum of a year. But ideally with a buy-and-hold strategy you’ll want to hold onto the positions for much longer. Warren Buffet recommends holding them “forever”, or at least 10 years.

So because you’ll want to hold on to these positions for a long time, you’ll want to invest in companies that you believe will grow in the long, long-term. Utility companies generally don’t experience very much volatility, and have a very slow, relatively reliable growth rate.

Other companies that will likely see much larger growth, and be around for the long haul could be: Apple, Johnson & Johnson, Amazon, and Google. The thing that all these companies have in common is that they are dynamic and they evolve, helping them be sustainable choices for long-term investments. As opposed to companies that are more rigid, and don’t evolve and change as humans and technology do; they fall behind, and are headed towards extinction, like what we saw with Blockbuster, for example.