The buy and hold strategy for fixed income assets

Sometimes, sitting and waiting is often the best option. In investing this is known as buy and hold, which literally means just that: buy and hold. Such a strategy is a good way to keep your sanity in the chaotic world that markets can be. Stocks can go up and down for no apparent reason, and fixed income can fluctuate simply because of statements by politicians or bankers.

Several centuries ago, Isaac Newton warned: “I can calculate the motion of the stars, but not the madness of men”. More recently, Benjamin Graham, the father of value investing (and Warren Buffett’s teacher) defined it with precision when he considered that “Mister Market is a schizophrenic in the short term, but regains his sanity in the long term”. In fact, he himself was one of the people who most deeply explored the buy-and-hold strategy to face this chaotic world.

What is the buy and hold strategy?

Buy and hold refers to a type of investment strategy that consists of acquiring stocks or other financial instruments and holding them in the portfolio for an extended period of time. By doing so, one benefits from the long-term growth and appreciation of asset values, while reducing the risks of selling prematurely out of impulse or fear. This strategy is based on the idea that financial markets tend to rise over the long term, despite fluctuations and economic crises that may arise along the way.

Buy and hold in fixed income

Although the buy and hold strategy is normally applied in the stock market world, it is also applicable in fixed income. In fact, it is even more desirable. The reason is that buying and holding equities is not easy, as they can fall sharply or rise sharply, and in both cases we may be tempted to sell our shares. With bonds, however, we know what their profitability is and until what date they are valid, since it is public information. This not only gives us peace of mind, but also prevents us from losing our capital.

Advantages and disadvantages of the buy and hold strategy

The buy and hold strategy benefits, among many other things, from the power of the long term, that is, to take advantage of forces such as compound interest that are more powerful as the years go by, since capital and interest generate higher returns. However, the advantages of this type of investment are extensive.

Advantages of buy and hold

  • Reduced costs: by limiting trades, there are lower transaction costs and commissions.
  • Reduced stress: by focusing on the long term, buy and hold investors do not worry about crazy daily market fluctuations. This is even more important in fixed income, since no matter what happens in the market, you will continue to receive your coupon.
  • Taking advantage of compound interest: Long-term investments allow you to take advantage of compound interest, which is the process by which returns generated are reinvested, in turn generating more returns in the future.

Disadvantages of buy and hold

  • Less flexibility: by holding investments for an extended period of time, the investor has fewer options to access liquidity or change his strategy.
  • Risk of loss: time can help to overcome market fluctuations, but there is no guarantee of this. This, for example, does not occur in the case of bonds, since the return for maintaining the investment is known, although we can encounter inflation that eats away at our profitability.
  • Less exploitation of opportunities: by limiting frequent operations, short-term investment opportunities may be lost.
  • Requires careful research and selection: the success of the buy and hold strategy lies in careful research and selection of assets, which can be laborious and requires in-depth knowledge of the market and companies.
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Roboadvisors: the solution to the buy and hold double trap

As you have seen, the real challenge of a buy and hold strategy lies in that last point: it requires very careful research and selection. That’s a difficult double problem to solve, at least until recently. The reason is that it either consumes a lot of our time or requires knowledge that we don’t have. The alternative of finding someone to do it for us is often expensive. In fact, value investors like Graham, who are pioneers of this strategy, frequently have high fees on their funds. In the end, both options reduce the returns obtained and their attractiveness.

However, that has changed in recent years thanks to the advent of roboadvisors. These are a type of automated manager that works through algorithms that have been perfected by a management team. This not only makes it possible to create a customized portfolio for each client according to their needs, but also to significantly reduce costs.

Take advantage of the buy and hold strategy through inbestMe

The solution offered by roboadvisors when it comes to investing in fixed income, especially if you are interested in buying and letting your money grow on its own, is what has led these platforms to grow rapidly. That is the case of inbestMe, whose main philosophy is closely linked to the buy and hold strategy, as it is the one that helps savers to obtain a higher return by taking advantage of compound interest. Moreover, at very competitive prices, which increases its attractiveness.

So, if you are interested in letting your money grow without worrying about it, the best option is to enter inbestMe and see for yourself how its wide experience together with its technology allows you to optimize your investments and grow your wealth. Don’t wait any longer!

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