By elmads

Investing in the capital market is a daunting task for novice investors. The amount of information that we need to know is broad and some of them is misleading. Nevertheless, it is not the end of the line, we can certainly still invest with only a miniscule amount of knowledge. Starting investors need to dip their toes first in the water to see how cold or hot the temperature is, and not to jump immediately and submerge their body in it.

Investing is not just about the amount of money we can gain from the markets, but also securing the safeness of our hard-earned capital that we invest. By doing the buy-and-hold method we gain the exposure we need from the market, at the same time we could continue our learnings about investing to find the best strategy that will suite our own financial goals, personality and lifestyle.

The most popular beginning strategy of investing is the buy-and-hold with cost averaging method. I have discussed this briefly in my previous blog titled “Investing Strategies”.

It is investing regularly in the market and not caring in the stock market price. Investing our hard-earned money will depend on our time interval of choice, either weekly, monthly, quarterly, bi-annually and yearly. That being said, investing is still mitigating the risk that our investment will not be in vain or in short, go to 0.

Misconception with Buy & Hold Strategy

Some investors automatically correspond Buy & Hold strategy with Lump sum investing, which is true but not entirely true. Buy & Hold is a universal strategy, it can completely be used jointly with all other investing strategies. It is the blood type “O” Negative in the world of medical haematology, in which it is the only blood type that can be donated to people of any blood type, hence known as the “universal blood type”. That is basically how buy and hold is being seen in the investing world, a strategy that can be practiced with all other specific investing strategy.

To give you context, below are the popular investing strategies with Buy & Hold.

• Cost Averaging Investing – An investment strategy in which we invest our money in a regular interval of our choice, without minding about the asset price. Buy & Hold is very popular with this method because most investors never sell with cost averaging, the goal is to, as much as possible accumulate a lot of the financial asset for long-term holding.
• Dividend Investing – Dividend investors focus on the yield they get from a financial asset, they only buy when the yield is enticing based on their personal preference. Let’s say 5% is the minimum yield we want, then we’ll look for financial assets that will give us an equal or more than 5% dividends. The mindset here is to gain passive income for the long-term. For this to happen, dividend investors need to Buy & Hold the financial asset for a long time.
• Growth Investing – Growth investors invest in companies that have high potential of exponentially improving their business operations, which will relate to faster income growth. Growth Investors are willing to pay for a higher price compared to the company’s current earnings, this is because investors know (based on their investment thesis) that in the future, these companies will be able to become the giant that they expect them to be. So, for that to happen we need to wait for the projections to pan out, that is why Buying and Holding is certainly applicable to growth investing.
• Value Investing – Buying mispriced financial assets with the expectation that the prices will revert back to its mean. Unfortunately, it takes a few months or years before the price goes back to its expected levels. Waiting for this to happen requires patience, and confidence with our investment thesis. Once value investors pull the buy trigger, they just hold the asset for a long time. Furthermore, even if the price reverts back to its mean, they are still willing to hold it forever as long as their initial reason in investing on that financial asset is still intact.
• Lump sum – Lump sum is a large one-off investing. Let’s say you have £500,000 worth of money, you’ll then invest that money on an asset in one go and just leave it there for a long time. Basically that is already a Buy and Hold strategy. That’s why people mostly think that Buy & Hold is also Lump sum investing, which is true in that context, but not completely true when it comes to absolute terms. Just like what I have said, Buy & Hold is a universal strategy that can be done hand in hand with other investing strategies.

Buying & Holding Company Stocks

Is it still possible to just do Buy & Hold with company stocks even if we do not plan to dig deeper into a company’s financials, profitability and future prospects? The answer is yes, though it is still risky if we do not completely know anything about the company we want to invest in. To mitigate that risk, I made simple steps that we need to consider when we plan to Buy & Hold a company stock without a deeper knowledge of the underlying company

• Basic necessities of life – Companies that provide our basic life needs. For instance, Electricity, water and the internet. People will always need these basic necessities of life even when world crisis happens.

• We use the products of the company regularly – When we use a specified product for a long time, we get used to it and know how reliable it is. Like for example, Facebook, we tend to use the social media site regularly, including Instagram which is also owned by Facebook.

• A household name– Observing what the major public is buying in a daily basis and if the demand has always been sustainable. One examples is Apple & Samsung, both companies consists the 35-40% of the world’s smartphone market share. We see almost all people in every corner of the world having either Samsung or Apple smartphones. That itself is a staggering feat achieved by these two technological giants of this century.

• Insider information – Sometimes working in a public company gives an investor an edge, because they’ll be able to attain first hand information within a company such as, changes in operations, management, investment plans and innovations of a company.

To give you further context, Ronald Reid who was a janitor and amassed 8 million USD in his life-time was a buy-and-hold investor who started investing in the stock market since the 1950s. He bought company shares that he knows by heart, these were the companies who manufactured and/or produced the products and services he used on a daily basis. Take note, Ronald did not have high intelligence, what he had was the proper and strategic behaviour to save and invest his hard-earned money. He had the perseverance and eagerness to accumulate wealth. Over time, his patience came into fruition as the markets granted him wealth that even some middle class struggle to attain.

Buy & Hold, and Cost Averaging Investing Combo

Investing in a company stock will always have a high risk of losing money most especially for investors who do not have the time or do not want to do further research about a company’s health and profitability. A lot of giant companies have went into bankruptcies due to strong competition, debt, economic collapse and management problems. Some popular company declines and bankruptcies are Kodak, Lehman Brothers, Enron, Blockbuster, Thomas Cook and many more. During the peak of these companies, no one ever thought that they will cease to exist after a few decades, but they did.

Nonetheless, don’t fret because there is another way for investors to invest their hard-earned money with less to no exposure in the company risks, and that is through active or passive fund investing. I have discussed this both further in my blog titled “Passive and Active Funds” & “Mutual Funds”.

We give our money to big institutions in order for them to invest it on our behalf. I do understand some people’s hesitancy about funds especially when we are a beginner investor, this is because of the fact that someone will be handling our own money, instead of us. That is where the risk of funds come in, but we will be only investing in big institutional funds with long track records of holding the money of the individual/retail investors. Examples are Vanguard Group, Black Rock, Fidelity Investments, PIMCO, Invesco and others more. Find the top institutional fund investors in your country and do your research about them.

The reason why funds are safer investments compared to individual companies, is because of their nature of diversification. It means that funds are invested usually in more than 50 companies and sometimes it exceeds 500 companies. It will also be them who does the research to find good companies to invest in. When the company in the fund’s portfolio is not a sound investment anymore based on their study and research, then they will just sell their whole share or a few portion of their positions.

The performance of a fund is based on the number of asset holdings they have and the percentage money they have in each asset. Then it will be computed per trading day. That is why funds also have a fund price chart which dictates their fund performance. See example below.

The chart above is a Blackrock fund which is invested in the top companies of each developed countries in the world. This fund has been operating for more than 8 years already and currently holds 1.7 billion USD under its management. Take note that the fund performance chart is not the stock price performance of a specific company but the total return of the fund’s performance based on the weighted average return of their total stock holdings.

By continuously investing in funds, we will be able to reap the benefits of the companies that the fund holds. In the long haul, these prices tend to go up in more than a decade which is the greatest power of buy-and-hold with cost averaging investing. As what the late Jack Bogle said

“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”

John C. Bogle, the founder of the Vanguard Group.

Investing on a fund that is invested in the top companies of a specific country means that we are confident in that specific country’s economy, or if we are invested in a fund that invests in the top companies of the world then you we confident in the world’s economy.

To sum it up

Beginner investors who does the Buy-and-hold, cost averaging with passive fund investing will have the average yet safest returns in the market. Time in the market is important than timing the market, opportunities are always present in the market whether at good or bad times, what is essential here is for us to start to invest as soon as we can. Doing the simplest method, while learning to improve our own process is one of the best strategies that a beginner investor could take in his/her journey.

Full disclosure, I also did Buy-and-Hold, and Cost Averaging Investing for 6 years, from 2013 to 2019, before I was able to transition into a full value investing strategy.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.