In Investing, like in many other aspects of life, something works until it doesn’t. Equity investors have experienced it over the last year. For example, Nifty50 is at the same level of ~17000 as it was one year back, and voices are questioning the same buy-and-hold strategy, which made almost 100% of returns for them in the previous two years. 

Buy and Hold is an investment strategy that involves buying stocks and holding onto them for an extended period despite market volatility hoping to gain long-term profits. Many top-performing investors, including the legendary Warren Buffet, advocate this strategy, and many investors follow it as well. Although this strategy may generate profits in the long term, it also comes with some significant drawbacks and criticisms.  

Inability to Respond to Market Changes 

The primary criticism the buy-and-hold strategy receives is that it doesn’t account for market changes. The market conditions are ever-changing, and sticking to stocks without considering those changes could lead to poor results. When the economy is suffering, some industries perform poorly, and markets fall. Investors should be able to respond quickly in such times to realign their portfolios, and holding onto investments without considering market volatility can lead to significant losses. An example is the Shanghai Index, which touched its all-time high in 2007; it’s been more than 15 years, and the index is still 45% lower today than those levels. 

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Belief in Efficient Market Hypothesis

In theory, markets are believed to be rational, but in actuality, they swing between euphoria and despair. One of the other key criticisms of the buy-and-hold strategy is that it assumes that the stock market always goes up in the long run. While this may be true over extended periods of time, but, there are periods where the market experiences significant declines. The tech bust of 2000 and Infra frenzy of 2007 are classic examples of it. Many stocks haven’t seen the high prices of those years ever again. 

The Potential of Damaging Portfolio

Another critique levelled at the buy-and-hold strategy is the risk of having badly diversified portfolios. Markets and industries never perform uniformly. Some stocks show exceptional growth, while others may be slow to progress. In the Buy and Hold approach, an investor can be tempted to add more and more to their stocks that seem to be doing well without regard to the real market performance or diversification. By doing so, investors increase the potential risks of damaging their portfolios if those stocks begin to perform poorly, which they eventually will. 

Time Risk

The buy-and-hold strategy requires long-term investments to generate profits. As with any investment, time in the market is key to achieving substantial returns with Buy and Hold. Furthermore, it may take years for the expected returns to happen, and there are chances that an investor may need their money back well before the portfolio has reached its potential.  

Knowledge Risk

Buy and Hold strategy expects investors to make informed decisions. They require detailed knowledge of stock prices, industry, market trends, and the reliability of the chosen stock. In case of a lack of experience or knowledge, this strategy can result in significant losses.  Additionally, regulatory changes, corporate governance changes, or a Black Swan event may cause long-term losses for a buy-and-hold investor. Credit Suisse is a classic example. The stock lost 95% value between 2007 and Nov 2022. It lost a further 80% in the last 3 months. 

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Despite these criticisms, there are still proponents of the buy-and-hold strategy. Warren Buffett, one of the most successful investors of all time, has long advocated the strategy. He once said, “Our favourite holding period is forever.” However, even Buffett has acknowledged that the strategy may only suit some investors. In his 2018 letter to Berkshire Hathaway shareholders, he wrote, “If you feel you can’t resist the temptation to speculate, the best course may be to avoid [stocks] altogether.”

So what can an investor do to mitigate these drawbacks of the buy-and-hold strategy? A diversified portfolio across market caps, sectors, and assets is the first thing an investor should adopt. A diversified portfolio across asset classes, geographies & currencies is far more resilient. Investors can also adopt alternative strategies, such as Rupee-cost averaging or value investing, that allow for more flexibility and adaptability when the market and the economy change. Knowing when to hold on to investments and when to cut losses is vital for any successful investment strategy. 

While the buy-and-hold strategy has been successful for many investors, it has its own flaws. Like one size doesn’t fit all, investors should carefully consider their investment goals and risk tolerance before deciding whether the buy-and-hold strategy is right for them. 

(By Gaurav Rastogi, founder and CEO, Kuvera.in)

(Views expressed above are personal opinions of the author. Please consult your financial advisor before investing)