A sizable number of financial experts agree that both the real estate and stock markets are among the most profitable ways to earn interest. They may be different in terms of the sectors they operate in but they have more similarities than most people think.

When implementing an aggressive strategy for stock trading, you want to find ways to bring down transaction costs such as trade commission. When purchasing a house, you also want to save on commissions paid to realtors. Just as a trader wants to find inexpensive stocks that have adequate room for growth, the real estate investor also seeks out properties they can renovate and sell at a profit.

In general terms, two types of stock traders exist. One believes they have a unique angle on the market or a special trading strategy that grants them an edge over others. Such traders execute numerous trades quickly to leverage market fluctuations and are more confident with risky investments. The other type of trader does not believe in secrets and trusts that all important things about a stock already exist in the business/product. When this kind of trader finds a stock they like, they buy it and hold it for years and even decades waiting for the market to prove the value of their investment.

Much like what the strategy entails, it is referred to as buy and hold. When effectively used, it is quite profitable. A good example is if one had the foresight to predict that caffeinated energy drinks would become a massive thing back in the early 2000s. Purchasing Monster Energy stock would have yielded a return of more than 80,000% over the last 20 years.

While it has its imperfections just like any investment strategy, buy and hold offers several advantages. Some have to do with risk appetite, financial capability, and asset class preference. Below you will find the main upsides to the buy-and-hold strategy.

Advantages of a Buy and Hold Investment Strategy

It is simple. The simplicity of a strategy removes a lot of risk factors and the buy-and-hold paradigm is gracefully simple. You only need to find value, purchase and let time and the market deliver profits. Other strategies may need you to check in on your investment on the hour or even minute, but with buy and hold you can check in after a month or even two. In this case, investors do not need to continually buy and sell their investments, constantly refer to the latest historical price information to perform technical analysis, and respond to current events, or short-term market outlooks.

The abundance of options. Another advantage is the availability of different investment vehicles to investors. There are even brokers that assist both the individual and institutional investor pick the most appropriate financial instruments and non-financial vehicles depending on the tolerance for risk. Such investment vehicles include bonds, stocks, and money market tools like time deposits, and futures contracts. Other options that exist in the buy-and-hold space include: 

• Commodities
• Artwork
• Financial derivatives
• Precious metals
• Real estate investment trusts
• Cryptocurrency
• We also have pooled funds that fall under the administration of fund managers. Such funds include unit investment trusts, mutual funds, investment-based insurance policies, pooled REITs, and exchange-traded funds to name a few.

Tax and cost savings. In territories like the United States, longer-term capital gains and dividends from holding stocks are subject to lower taxes than short-term capital gains. Some jurisdictions even have laws that require taxation only when assets sell. Depending on the taxable income and filing status of the person, the tax rates sometimes get as low as 0%.

Due to the passive nature of the buy-and-hold strategy, expenses are low since there are fewer commissions and transaction fees. Passive investing methods have fewer transactions than active techniques. It is also worth noting that pooled funds provide an affordable way to accumulate an investment portfolio. In comparison to stocks and digital currencies, individuals may develop a diverse portfolio with fewer pooled fund accounts.

Buy and hold outperforms active management. Numerous studies and analyses show that buy and hold outperform active management of assets in particular instances. A 2019 study revealed that there exist several papers that contain historical data evidencing that passive management outperforms active management. Another 2019 study of the German equity market showed that the expenses associated with active fund management offset the margins and value-creation involved. The study concluded that active funds do not create notable value.

Cost averaging benefits. One more benefit of the buy-and-hold technique is that it leverages the advantages and potential of cost-averaging. Cost averaging involves acquiring assets at set gaps and pre-determined limits over a long time. Doing this translates to buying assets at different prices and market conditions. The aim of cost averaging is to lower the amount of money used to purchase investments while also reducing risk. It is important to note that purchasing the same investment tool frequently over an extended period results in buying it at different price points. Some price points are high while some are low, but the collective price is representative of the average of the different price points.

Conclusion

The buy-and-hold investment strategy has several advantages ranging from reduced transaction costs, higher yield potential, and minimal effort. Among the different advantages, the range of options available to investors is widely considered the best. You get the freedom to choose from what you are familiar with, your appetite for risk, and your financial ability. For novice investors who want to test the waters before fully indulging, this may be a very good way of getting their feet wet.