Buy-and-hold investing, at times known as passive investing, is a widely popular investment approach. As per Kavan Choksi, under this approach, people invest in stocks and other securities with the aim of holding onto them for an extended span of time, no matter the changes in the stock market. The day-to-day market movements are ignored by passive investors. They rather allow the investment to perform over the long term.
Kavan Choksi marks a few benefits of passive or buy-and-hold investing
The goal of passive or buy-and-hold investing is to build wealth gradually. Passive investors do not profit from short-term market fluctuations or market timing. Owning funds that seek to replicate market indices, like the S&P 500, is among the most popular forms of passive investing.
The United States stock market can be intimidating at times. There are also situations when it causes experienced buy-and-hold investors to second guess their strategy. Nevertheless, even though past performance is not a guarantee of future returns, history has shown that the market can recover from declines and still manage to provide investors with a positive return on long-term investments.
Following a buy-and-hold strategy can additionally help investors to make sure that they do not miss out on the biggest days of the market. One of the most complicated aspects of choosing when to be in or out of the market is that missing a few important days or weeks of a 5-to-10-year cycle can have a huge impact on the returns. A significant portion of the gains and losses in the stock market historically take place just a few days of any given year. As the patterns of returns are not predictable from one month to the other, a consistent long-term investment can help add to the bottom line.
Another major benefit of a passive investment strategy is that it allows investors to take advantage of compound growth. Even though past performance is not a guarantee of future returns, it can be a good indication of what to expect. The S&P 500’s inflation-adjusted annual average return on investment is about 7%. This basically means that the index’s value, on average, is 7% higher at the end of the year than it was at the start. Such gains accumulate over time, and can provide a major benefit to the ones who invest early and let their money continue to accumulate.
As per Kavan Choksi, it is common for investors to try to wait for the “right” time to start putting money into the stock market. But in doing so, they end up sacrificing an important opportunity, which is to collect dividends. Even though individual dividend payouts may seem small, they are responsible for more than 40% of S&P 500 gains. Stock market investors may opt to cash in their dividends as soon as they are available. Alternatively, they may even reinvest the dividends back into the market, automatically or manually. Automatic dividend reinvestment is especially useful in expanding the portfolio with minimal effort on the part of the investor. When one reinvests their dividend payouts, they would be able to buy more shares that earn additional dividends.