Is 'buy and hold' the right rule for equity investments?

Posted by: Arti Bhargava on Jun 12, 2017, 06.30 AM IST

Our case study is a 45-year-old doctor, who happens to be an avid equity investor. Over the next 20 years, he wants to build a sizeable retirement corpus. At a time when stock movements are tracked by the minute, the doctor's mantra has been to identify good quality companies, invest in their equity shares and then forget about them.

He believes in "buy and sit tight", irrespective of market levels, valuations or global cues. He has heard stories about millions becoming rich as stock prices rose manifold over time.

As prices rise and dividends are paid out, the compounding benefit sets in, leading to a higher rate of return over a long period. Moreover, he wants to avoid the anxiety of trading, tracking and timing the market. Is this a sound investment strategy?

Buy and hold sounds easy to execute. It is a form of passive investing. After buying the stocks, the doctor simply lives his life and waits for his investments to grow! However, he should be wary of regarding it as an all-weather, all-condition investment solution.

For example, a bear market situation triggered by a global financial crisis closer to his retirement could wipe out the doctor's profits accumulated over the years. Or consider a company going through a bad phase and performing dismally, with no hope of revival.

Wouldn't the investor be better off reviewing his portfolio at regular intervals and exiting stocks that are likely to underperform?

While a buy and hold strategy allows the doctor to ride out the temporary blips over the long-term, turning a blind eye to the markets and the companies he has invested in can be dangerous. He must be mindful of the market scenario and performance of companies, so he can consider selling if the quality of the business or the management is seriously impaired.

Buy and hold is not a prudent strategy to follow at all times. Especially in today's dynamic environment where the information flow is super fast, the world is more integrated and dynamic. The buy-and-hold has to become 'buy, hold and monitor'.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta) This article appeared in Economic Times dated Jun 12, 2017, 06.30 AM IST