Why "buy and hold" still matters

[UNITED STATES] In a year marked by market volatility and economic uncertainty, the "buy and hold" investment strategy remains a steadfast approach for long-term investors. Despite short-term fluctuations, this passive investment method continues to offer potential for growth, especially for those with a long-term perspective.

The buy and hold strategy involves purchasing securities and holding them for an extended period, regardless of market fluctuations. This approach is grounded in the belief that, over time, markets tend to increase in value, rewarding patient investors.

Key Advantages:

Simplicity and Cost-Effectiveness: By minimizing the frequency of trades, investors can reduce transaction costs and avoid the complexities of market timing.

Tax Benefits: Holding investments for longer periods can lead to favorable long-term capital gains tax rates.

Historical Performance: Historically, major indices like the S&P 500 have shown resilience, with average annual returns exceeding 10% since its inception in 1957.

Potential Drawbacks:

Exposure to Market Volatility: Investors may experience significant short-term losses during market downturns.

Reduced Flexibility: The strategy requires a commitment to long-term holding, potentially missing out on short-term opportunities.

Emotional Challenges: Investors must maintain discipline, resisting the urge to sell during market dips.

Current Market Landscape

As of May 2025, the S&P 500 has experienced a 10% decline year-to-date. Despite this, analysts remain optimistic about the long-term prospects of the index. Morgan Stanley, for instance, has raised its outlook, citing signs of market stabilization and improving growth conditions.

However, short-term volatility persists. Bank of America analysts suggest that a pullback in the S&P 500 may be imminent due to technical indicators, advising investors to "buy the dip."

While many individual investors have historically struggled to time the market correctly, institutional investors and hedge funds have also shown renewed interest in long-term equity positions. According to a recent report by J.P. Morgan Asset Management, 68% of large institutional funds plan to increase their equity exposure over the next 12 months, citing long-term earnings growth potential and favorable interest rate forecasts. This renewed confidence provides indirect validation of the buy and hold philosophy from some of the largest players in the market.

Meanwhile, technological advancements are reshaping how retail investors engage with buy and hold strategies. Robo-advisors and algorithm-driven platforms now offer automated portfolio management with minimal fees, making long-term investing more accessible to the average person. Platforms such as Betterment and Wealthfront have gained traction, particularly among younger investors who prefer hands-off, tech-enabled approaches to financial planning.

Emotional Resilience in Investing

The emotional aspect of investing cannot be overstated. Retiree Bill Jensen's experience underscores the importance of staying the course. After a significant market drop in April, Jensen chose to remain invested, ultimately witnessing a recovery.

Financial advisors emphasize the need for emotional discipline. Jon Ulin, a financial advisor, notes that providing emotional support is as crucial as offering financial guidance, especially during periods of market turbulence.

Recent behavioral finance studies support this view. Research from Morningstar found that investors who stuck with their investment plan during the 2022–2023 downturn outperformed those who pulled out and attempted to re-enter the market later. The average performance gap between “buy and hold” investors and those who tried to time the market was more than 2.5% annually over a five-year period. This gap underscores the high cost of emotional investing decisions driven by fear or media headlines.

Strategic Considerations for Investors

For those adhering to the buy and hold strategy, several considerations can enhance its effectiveness:

Diversification: Spreading investments across various sectors and asset classes can mitigate risks associated with market volatility.

Dollar-Cost Averaging: Regularly investing a fixed amount can reduce the impact of market fluctuations and lower the average cost per share over time.

Periodic Portfolio Review: While the strategy is passive, occasional reviews ensure that the investment aligns with long-term goals and risk tolerance.

In the face of market uncertainties, the buy and hold strategy offers a disciplined approach to investing. By focusing on long-term objectives and maintaining emotional resilience, investors can navigate market fluctuations and position themselves for potential growth. As always, consulting with a financial advisor can provide personalized insights tailored to individual circumstances.