Those who rely on a long-term strategy need a lot of discipline. Even if the share price develops negatively over a longer period of time, you have to keep your nerve. When active investors have long since sold their securities, passive investors leave them in the portfolio.
Not every investor is suited to keep his hands still when the share price fluctuates. If an entire market collapses, this can mean a few sleepless nights for the investor. This makes it all the more important to spread the risk across different asset classes and markets.
If you have to dispose of your invested capital in the short term, a buy and hold strategy is ill-advised. This strategy is not geared to the premature sale of securities. When markets are volatile, as they were in 2014 and 2015, an active strategy is often the more profitable option. While there are fees associated with each transaction, the return can be higher with skillful trading.
In calm stock market times, on the other hand, investors can keep their hands off the portfolio with peace of mind. Viewed over the long period of buy-and-hold, however, there may be some years in which active portfolio management would have been more profitable or more advisable.
The financial crisis of 2007 should be mentioned here in particular. Comparatively quiet years, however, can also drag down returns if, for example, the low return has to be compensated for inflation in the event of weak share price performance, or if losses are incurred in Exness mt4 as a result.
Buy and hold strategy brings tax advantages
The long-term orientation of the strategy results in tax advantages for the investor. Taxes on price gains do not accrue until the holding period has expired. The saved tax amount can be invested in the meantime, which enables additional profits. Investors receive a quasi loan from the tax authorities that can be used flexibly.
With actively managed portfolios, not only are fees incurred for each transaction, but all profits must also be taxed immediately.
Banks tend to advise their clients against a very long-term strategy. This is not surprising, as they hardly make any money on passively managed portfolios. Short-term strategies with a lot of buying and selling are much more profitable. So it is not surprising that active investors are preferred by banks.
The buy and hold strategy is designed for the long term. Terms of 10, 20 or 30 years are not uncommon. During this period, a lot can happen in the fast-moving markets. Decisions have to be made only at the beginning of the investment. The most important thing is to spread the risk as widely as possible. Such long-term investments are very often used to build up a private pension. Customers save money with the buy and hold strategy and can also take advantage of tax benefits.
How the portfolio is put together always depends on the financial possibilities of the investor. Risk tolerance and the financial products in question also play an important role. The broadest possible risk diversification is of great importance for the success of this strategy. Those who spread their capital over several asset classes reduce the risk.
An important focus in the composition should be on the costs incurred. Exchange traded funds (ETFs) are particularly suitable for this purpose, as they only incur low fees compared to traditional investment funds. ETFs track a complete index such as the DAX and therefore do not require a fund manager. In addition, risk diversification is already included here. Due to the low costs, tidy profits can still be achieved even with a lower return.
In addition to low costs and little effort, other advantages include the so-called present value advantage and the saving of all transaction costs.