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Buy-and-Hold Investment Strategy – 11 Tools & Techniques for Success


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There are many ways to go about investing, and buy-and-hold investing is one of the most popular investing strategies among retirement accounts. It’s also the traditional investing strategy that most people picture when they think about investing in the stock market.

The idea is simple: Buy stocks and other financial assets at a good price now and hold them for the long haul. Although these assets may see volatility in the short term, with valuations going through its uptrends and downturns, history tells us that values across the stock market will generally rise over time.

Buy-and-hold investors count on the idea that by purchasing shares of stock, exchange-traded funds (ETFs), mutual funds, or index funds now, holding them for a long period of time, and ignoring short-term fluctuations in value, you’ll have the ability to enjoy the profits of your long-term investment decisions.

Tools & Techniques of Buy-and-Hold Success

As with any investing strategy, there are several tools that are available to those who intend to take advantage of the buy-and-hold strategy. Some of the most helpful tools include:

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Due Diligence Tools and Techniques

The most profitable investment decisions tend to be educated ones. Educating yourself on the securities you buy is so important that Wall Street uses the term “due diligence” to describe the research that investors should do before risking their first dollar on any asset.

When performing due diligence, investors look at various metrics, past performance, financial stability, and more to ensure that their long-term investing goals will be met through their purchase of an individual stock, bond, or other asset.

Here are due diligence related tools and techniques you should consider when deploying the buy-and-hold investing strategy:

1. Fundamental Analysis

Investors who seek to own successful long-term investments must thoroughly investigate each company they want to own and the industry in which it operates, as well as the conditions in the general economy. Your analysis enables you to understand the business and its future prospects before becoming an owner.

Value investors should be competent in fundamental analysis, a process most associated with Warren Buffett and his former mentor, Benjamin Graham. Graham, the author of “The Intelligent Investor,” is generally acknowledged as the father of fundamental analysis.

A buy-and-hold investor reviews a company’s historical financials to understand its revenues, earnings, future growth, capital structure, return on equity, profit margins, and other data to identify businesses with a competitive advantage. This research helps buy-and-hold investors find the most significant potential opportunities for future profits.

Industry and competitor data are scrutinized to identify the company’s competitive strategies and whether its approach creates a market advantage that can be sustained. Company management is another key to success, and superior leadership is often revealed by long-term superior results.

2. Use of External Analyses and Data Collection

Competent fundamental analysis requires a thorough knowledge of accounting, financial statements, and financial ratios, as well as access to current and recent data. The process is also time-consuming. As a consequence, many buy-and-hold investors rely on free or paid analytical services — easily found on the Internet — to facilitate data gathering and analysis for them. In most cases, multiple analysts follow the company in question and its industry, allowing potential investors to view various and sometimes conflicting opinions.

There are numerous data sources — free sites like Morningstar and YahooFinance, and paid resources like Trade Ideas, Bloomberg Professional and Quandl — that offer comprehensive information on securities and stock prices of companies across the stock market and around the world. Many offer sorting capabilities based on specific criteria to cut down the search for possible purchase candidates and more in-depth research.

Online brokerage firms like TD Ameritrade, Charles Schwab, and Tradestation offer desktop tools to aid analysis as well as their employed analysts’ buy and sell recommendations. Users should be aware that brokerage firms benefit from trading volumes and consequently recommend frequent transactions and short-term positions. These transactions are quite risky. So, although the data is valuable, investors should not be swayed away from a buy-and-hold strategy and lured into a short-term day trading strategy by these tools and their recommendations.

It’s important to do your own research rather than relying solely on analyst ratings. The U.S. Securities and Exchange Commission (SEC) cautions of potential conflicts of interest: “Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover — either directly or indirectly, such as through employee stock-purchase pools in which they and their colleagues participate.”

Moreover, according to U.S. News & World Report in 2017, some stock analysts may not be as objective as you might expect. The piece suggests there is an unwritten you-scratch-my-back-I’ll-scratch-yours rule between research firms and public companies that runs the risk of coloring the ratings analysts give.

When using an external data gathering or analysis source, be sure to confirm the information with a second source and validate opinions with your own good sense.

3. Other Systems of Analyses

There are multiple variations of fundamental analyses that have been popular at various times. A sample of those systems includes the:

  • F-Score Value Investing System. Accounting professor Joseph Piotroski outlined the F-Score Value Investing model in a paper published in 2000. Proponents use a point system with nine criteria to screen the best stocks for a buy-and-hold investment. Companies that score positively on at least eight points are considered excellent candidates for long-term growth.
  • CANSLIM System. The capital letters represent an acronym spelled from the seven quantitative or qualitative factors used to identify an optimal target company for purchase. The system was developed by investor William J. O’Neil in the 1980s and remains popular with some investors who take part in a long-term investment strategy.
  • Dividend Stability and Growth System. Some investors only acquire companies that have a history of regularly increasing dividends. The system is based on the assumption that periodically increasing dividend payments to investors indicates a solid financial base, continued growth, and exceptional management.

The search for stock market profits can be confusing with often contradictory advice. Many have developed systems that are “guaranteed” to work, but inevitably fail. Nonetheless, these tools provide an opportunity to learn more about stocks, the stock market as a whole, and human psychology. If you decide to rely on any system, tread cautiously before committing significant funds that may be lost.

Strategic Tools and Techniques

Analyzing the validity of a buy-and-hold investment through the use of fundamental analysis helps to increase your probability of success when making a single investment. However, there’s more to investing than ensuring that the assets you buy have a high probability of growth.

Here are several investing strategy-related tools and techniques that will further assist you in reaching buy-and-hold success and achieving your financial goals.

4. Maintain a Diversified Portfolio

No matter how much due diligence you perform before making an investment, doing so is an attempt to predict the future, and chances are you’re not a fortune teller. As a consequence, you’re going to be wrong from time to time, as all investors are. Being wrong in the stock market means accepting losses.

That’s where diversification comes in.

Diversification is the process of spreading the assets in your investment portfolio across a wide range of financial assets. In doing so, should one or two of your investments result in declines — as will inevitably happen from time to time — your entire portfolio isn’t exposed to significant losses.

When deploying the buy-and-hold investing strategy, it’s important to maintain a well-diversified portfolio, buying multiple assets across multiple asset classes.

5. Consider Buying ETFs, Mutual Funds and Index Funds

ETFs, mutual funds, and index funds — referred to simply as “funds” — are bucket investments that are largely based on diversification. These are a perfect option for investors with a low risk tolerance or with little time to perform detailed due diligence surrounding an individual company. These funds are designed to expose investors to an underlying index, sector, or other benchmark as a whole.

For example, an investment in a Nasdaq 100 index fund exposes investors to all 100 individual stocks listed on the Nasdaq 100 index, just as an investment in the S&P 500 index fund exposes you to all 500 stocks listed on the benchmark S&P 500 index.

Mutual funds and ETFs are also heavily diversified investment vehicles. These funds invest in whole sectors of the market, or even the entire market.

Because investment-grade funds are generally heavily diversified, they provide the long-term investor exposure to the long-term gains that the overall market has to provide, while diluting the risks associated with any single asset.

When choosing investment-grade funds, pay close attention to the expense ratio investors pay. By avoiding funds with high expense ratios, you’ll keep more of your profits, which can mean the difference between becoming a thousandaire and a millionaire by the time you retire.

6. Take Advantage of Discounts During Bear Markets

Bear markets are scary times for investors. Characterized by declines of 20% or more from most recent highs across a sector or the stock market as a whole, investors who get caught in a bear market experience painful short-term losses.

That doesn’t sound like a good thing for buy-and-hold investors but, overall, bear markets are an opportunity.

Historically, bear markets have been relatively short-term occurrences. Moreover, following a bear market, there is generally a bull market, which more often than not starts with a volatile run up toward more reasonable values after serious undervaluations during the bear market.

So, by holding your investments through the bear market, you may experience short-term losses, but valuations will generally recover in short order.

This leads to the opportunity.

When a bear market takes hold, investors have the opportunity to add to their holdings at a discount. After all, widespread undervaluations are commonplace in bear markets, meaning that buying at bear market prices offers up a discounted opportunity to get in on future gains.

So, rather than panic-selling during bear markets and realizing losses, buy-and-hold investors often take full advantage of the opportunity to buy more shares of quality, publicly traded companies at a discounted price.

7. Look for Assets With Low Valuations

A bear market doesn’t have to be in full swing in order for discounts to appear in the stock market. In fact, undervaluations are quite common on Wall Street. After all, regardless of fundamentals, a stock is only worth the amount of money investors are willing to pay for it.

As a result, stocks that are relatively underrecognized — even those with a solid financial and operational foundation — are generally undervalued.

To determine whether a stock or other security is undervalued, overvalued, or trading at fair market value, all you need to do is compare the security’s three key valuation metrics to the average among similar securities. These valuation metrics include:

  • Price-to-Earnings Ratio. The price-to-earnings ratio, or P/E ratio, compares the price of a single share of stock to the earnings per share (EPS) generated by the company over the past calendar year. For example, if the stock price is $10 and it produced $1 in EPS over the past year, its P/E ratio is 10, meaning it would take 10 years of earnings to recover the cost of the stock if there was zero growth ahead.
  • Price-to-Sales Ratio. The price-to-sales ratio, or P/S ratio, compares the overall market capitalization of a stock to the revenue generated by the company over the past year. For example, if a company is trading with a market cap of $100 million, and it produced $10 million in sales over the past year, it is trading with a P/S ratio of 10.
  • Price-to-Book Value Ratio. Finally, the price-to-book value ratio, or P/B ratio, compares the overall market capitalization of a stock to the book value of the company’s assets. For example, if the company owns assets with a total book value of $50 million and trades with a market capitalization of $100 million, its P/B ratio is 2, suggesting that the stock is trading at twice the value of the assets owned by the company.

8. Invest in Blue-Chip Stocks

Well-established, popular companies that have become household names will generally stand the test of time. Think of companies like Apple, Facebook, and McDonald’s. Can you think of any scenario that would cause the companies to fail and fall into bankruptcy?

Although anything can happen on Wall Street — as was proven by the fall of Enron — companies with a strong history that have built their brand to the point where the average American consumer knows their name have a much stronger potential for long-term growth than smaller, less recognizable companies.

On top of the fact that blue-chip stocks have a history of producing long-term growth, there is also the added benefit of potential dividends. The vast majority of stocks that trade in the blue-chip category offer dividends to investors.

A savvy buy-and-hold investor sees dividend payments as an opportunity to expand long-term investing success through dividend reinvestments.

9. Time Horizon-Based Asset Allocation

Buy-and-hold investing is a popular strategy for retirement accounts due to the long-term nature of the investing strategy. When investing with a long-term horizon, asset allocation is key.

Early on in your efforts to become a successful buy-and-hold investor, you’ll be able to accept a higher level of risk because you’ll have more time to recover should things go wrong. As you get closer to your cash-in date, it’s important to reduce your exposure to risk to ensure that no significant losses are realized in the years leading up to your retirement.

As a result, it’s best to use a time horizon-based asset allocation strategy. One of the best ways to do this is simply to use your age as a guide. As a rule of thumb, you can use your age as the percentage of your investment portfolio’s assets that should be invested in low-risk assets like bonds. The remainder will be invested in higher risk assets like stocks.

For example, if you’re 35 years old, you might keep 35% of your investment portfolio invested in bonds and other low-risk assets, with the remaining 65% of your portfolio invested in stocks. By the time you turn 50, you’ll have an even 50-50 split between stocks and bonds. At any age over 50, the majority of your portfolio will be invested in bonds and other safe assets, in order to meet the goal of maintaining a relatively low level of risk as you near or enter retirement.

10. Rebalance Your Investment Portfolio Quarterly

A common misconception is that when you practice the buy-and-hold investing strategy, you shouldn’t sell stock at all. However, this misconception has the potential to lead to significant losses.

Although stocks will generally experience peaks and valleys over the long haul and will generally grow in value in time, there are several reasons that a stock may fall, some of which are a signal that it’s time to sell your position.

For example, a buy-and-hold investor may have seen incredible promise in GoPro early on, making the decision to buy the stock. However, when the company’s extreme action cameras hit the market and failed to produce the robust sales everyone expected, savvy buy-and-hold investors eliminated GoPro from their investment portfolios, using funds invested in the company toward other investment opportunities.

No matter what investment strategy you’re deploying, it’s important to rebalance your portfolio on a quarterly basis at the least. Some of the most successful buy-and-hold investors look into their portfolios monthly. The more attention you pay to your investment portfolio and the assets within it, the stronger your chances are of producing compelling long-term returns.

11. Seek Advice From a Registered Investment Advisor

Investing isn’t something that you learn in public school, and you might learn about it in only a few college programs. As a result, there’s no shame in being confused and unsure of what to do with your money in the stock market.

If this describes your feelings toward investing, you’ll benefit greatly from a conversation with a registered investment advisor, or RIA. RIAs have passed stringent testing to ensure that they have a detailed understanding of the inner workings of the stock market, and their sole purpose is to provide you with investment advice.

When working with an RIA, you generally have two options in terms of engagement and cost:

  • Manage Your Own Portfolio. If you’d like to manage your own investment portfolio, but you’d also like advice from time to time to make sure you stay on the right track, there are plenty of investment advisors who will charge an hourly rate for consulting services.
  • Hand Control of Your Portfolio Over to the Pros. Most investment advisors also offer investment portfolio management services. With these services, you can step away from the investing process completely and let your RIA make your moves in the stock market for you. In this case, your RIA will charge a percentage of your portfolio’s assets as an annual fee. However, if you choose to let an RIA take control of your investments, make sure to do your research on the firm. Even Warren Buffett has pointed out that most fund managers underperform compared to low-cost index funds.

Pro tip: If you’re unsure where to find a qualified investment advisor, you can start with SmartAsset. They will match you with multiple fiduciary advisors in your area and you can choose the best fit. Alternatively, you can use Vanguard Personal Advisor Services. When you sign up you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals.

Final Word

The buy-and-hold investing strategy is popular because it’s effective. Historically, the overall stock market generates gains that average about 10% per year. So, by purchasing assets and holding them for the long haul, you stand a high probability of investing success.

Although many on Wall Street successfully employ the buy-and-hold strategy, you shouldn’t fall for the misconception that you can blindly buy stocks and other securities and expect to generate returns over time. Investment decisions should only be made with adequate research to ensure success. Not all stocks will experience long-term gains. Before making any investment, it’s important to do your research to get an understanding of the opportunity and risks that come along with the investment you intend to make.

By using the tools and techniques outlined above, you’ll be well on your way to buy-and-hold investing success.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.