Different people each have their own view on what is the right investment approach for them. Rather than trade actively by jumping in and out of shares, I am a buy-and-hold investor. Here are two reasons I think following this approach can help me when it comes to my Stocks and Shares ISA.
Fewer dealing costs
Each time I buy stocks via my ISA, I pay some fees. Some of those are obvious ones, such as dealing charges and stamp duty. But some of them are not so obvious. For example, there is what is known as the spread between a buying and selling price.
Basically, when stockbrokers trade shares, one source of income is the commission they charge both the seller and buyer in the transaction. But another source of income is the spread. In layman’s terms, this is essentially the mark-up charged by stockbrokers on the price they pay for the shares before reselling them. In shares that are traded in massive volumes daily, the market is liquid so such a spread can be tiny. But in more thinly traded shares it is noticeable.
Take as an example Income & Growth Venture Capital Trust, which I have been considering for my ISA. As I write this, I can buy one share for 92p. But if I sold it, I would only receive 89p. In effect, this spread acts as another cost when I trade in my Stocks and Shares ISA. The more frequently I trade, the more costs I will incur – and they can soon add up, eating into any profits I make. By contrast, if I buy a share and hold it for the long term, my costs will be lower.
Focused attention
Famous investor Warren Buffett says that if one would not think of holding a share for 10 years, one should not even consider holding it for 10 minutes. That is clearly not the mantra adopted by traders in meme stocks, who seek to flip shares fast.
Such trading is not the approach of a buy-and-hold investor. Instead, this investment strategy means taking a long-term view based on the fundamentals of a business, not a short-term approach that looks only at its share price movements.
I think one of the benefits of using such an approach when investing in my ISA is that it helps me weed out what I might call marginal shares. These are companies where I see a tailwind that could help in the near future, but am less convinced by how things will look a decade down the line.
Hopefully my approach will help me focus my attention on really great businesses that could be profitable for many years to come.
Buy and hold
I reckon buy and hold makes sense for me as a private investor, even if I am investing only small amounts in my ISA. Hopefully I can profit from buying shares in select businesses, as time works its magic.
