Using Warren Buffett’s buy-and-hold strategy could provide the opportunity to generate higher returns in the long run. A buy-and-hold approach provides portfolio holdings with the time they may need to deliver on their strategy. It also avoids trying to time the market over the short run, which may prove to be a hugely challenging task for any investor.
Of course, following Buffett’s buy-and-hold strategy does not guarantee success. There is always a risk of losing money on an investment in any company. However, it could improve an investor’s chances of generating positive returns over the long run.
Warren Buffett’s buy-and hold approach
Warren Buffett has always used a long-term approach to investing. His favoured holding period is apparently ‘forever’, which in practice has often meant many of his biggest portfolio holdings were first purchased decades ago.
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Providing any company with a long time horizon can mean it has greater deliver scope to deliver on its strategy. For example, it may be about to expand into a new product line or region. Or, it could be seeking to reduce costs to become more efficient. All of these changes take time to implement, and then even longer to have an impact on a company’s financial performance. Then, they make take some time to positively affect a stock’s price. As such, selling a stock too soon after purchase may mean missing out on its improved outlook.
Warren Buffett’s buy-and-hold approach also means that investors avoid seeking to time the market in the short run. Of course, they may still seek to buy when the market is at a low price level and sell stocks when it is trading higher. However, a buy-and-hold strategy means that seeking to trade stocks over a period of weeks or months is avoided. This may save on commission costs, while the volatile nature of the stock market means it may also reduce overall portfolio losses.
More than buying and holding shares
Of course, buying and holding stocks is just one part of Warren Buffett’s overall investment strategy. He also seeks to buy high-quality companies that have large economic moats when they trade at low prices. In doing so, he reduces risks and obtains greater scope for capital gains. He also focuses on sectors in which he has a large amount of knowledge. While this means he misses out on some exceptional investing opportunities, it also cuts the chance of making losses.
However, a buy-and-hold strategy could represent a good starting point when it comes to seeking to generate high returns from investing money in equities. Through using the stock market’s long-term growth potential to their advantage, investors may be able to grow their portfolio at a faster rate with less risk compared to seeking to buy and sell shares in quick succession and before their full potential has been realised.
