The buy and hold strategy has taken plenty of heat over the last ten years. With two major corrections during that cycle the return on investment hasn’t been exactly stellar. Holding positions in your portfolio long term is okay as long as you have disciplined strategy for doing so. To hold just because you think it is a good investment isn’t the kind of rationale I am talking about. I am talking about understanding what you own and why. Even good research picks up stocks that never seem to pan out. Having a strategy, as we have already discussed, for entry, exit and target works regardless of the timeframe. Let’s say for example you want to own General Electric long term in your portfolio. You do your research and take a position at $35 per share. Your target is $50 and your stop is $27.50. You have given the stock plenty of room to the downside to deal with the risk you are willing to take in holding the position. This is a plan for holding long term. The key is have a plan and a rationale for holding the stock.
There are plenty of reasons to like holding stocks long term when you start investing. Time management is one vital key. Another is not trying to time the market short term. Regardless of timeframe for holding, you still need to have a strategy for holding them and updating it on a regular time interval. In other words buying something and then just forgetting about it isn’t long term investing. Monitoring your investments on a regular schedule is important regardless on time periods for holding. Does the reason you purchased the asset still hold true now? What does the horizon look like for the stock? Would I buy more of the stock today? Ask questions that validate ownership looking forward. Don’t get caught up in the emotions of the past. Evaluate relative to forward progress.
You can use options and other strategies on longer term holdings to hedge short term risk as well as enhance returns during sideways trends. As you build a portfolio and develop winning strategies for doing so, managing the position is the key element to success. The longer you hold a position in your portfolio the management of the position becomes more important. Thus the fourth step in “Helping yourself Build a Winning Strategy” is, holding positions long term is okay – as long as you have a strategy for doing so! The Final step is, “If you don’t want to do it yourself – then what?”