Is Buy and Hold Still a Good Investing Strategy?

Investing in Toronto-Dominion Bank (TSX:TD)(NYSE:TD) for the long term will be fine, but be careful about other stocks that you consider to buy and hold.

| More on:

With so many different types of investing strategies, including high-frequency trading, momentum investing, etc., is a buy and hold strategy behind the times?

The short answer is — it depends largely which stocks you’re holding.

A potential buy-and-hold strategy

Some investors take profits from winners and hold on to losers, hoping that the losers will recover some day. However, doing so will be detrimental to the health of your portfolio.

If you perform due diligence and trust in your stock picks, then it may make sense to hold all your stocks, since you don’t know which will outperform in the long run. In a portfolio, you’ll just have to accept that there will be losers, winners, and some in between. Even the best of the best investors don’t hit a home run on every investment they make. The idea is that the outperformance of the winners should more than cover the losses of the losers.

Sometimes you have to sell, maybe even at a loss

Sometimes you end up with a stock that’s entirely different from what you had in mind.

In 2015, Concordia International Corp. (TSX:CXR)(NASDAQ:CXRX) was bid up to over $100 per share. Some investors might have jumped in, thinking the stock could go higher. However, the stock quickly fell to $40 per share. Some investors might have bought it then, thinking they were getting a bargain after the large drop, but look where the stock is now — trading at $0.28 per share.

The best scenario would be not having bought such a stock in the first place, but if you did, first of all, don’t buy more. Second of all, get out of the stock (hopefully, at an opportune price). For such stocks, cutting losses early is better than holding on to the stock.

Stocks you’d want to buy and hold

Certainly, there are great businesses that are worth buying and holding for the long run. If a business continues to become increasingly profitable over time, there’s no reason to sell the stock unless it becomes excessively overvalued.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is an example of a great business. It operates in an oligopoly environment in Canada, and it has meaningful contributions from its U.S. operations.

The stock has delivered long-term returns of about 9.5% per year since 2001, which exceeded the less than 5% per year returns of the U.S. market in that period.

The bank is trading at a reasonable multiple currently at about $76 per share. Given that it’s estimated to grow its earnings per share by at least 9% for the next three to five years, an investment in TD today can deliver returns of at least 12% if it trades at a normal multiple. That’s a fabulous estimated return for an investment in a great business.

Investor takeaway

Investors need to perform careful research before buying any stocks. A buy-and-hold strategy will work for a portfolio filled with great businesses.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »

Make a choice, path to success, sign
Dividend Stocks

Is Fortis Stock a Buy for its Dividend Yield?

Fortis has increased the dividend for 51 consecutive years.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Is Brookfield Stock a Buy, Sell, or Hold for 2025?

BAM stock recently jumped after beating earnings. But is it still a buy, or is it better to wait?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Top Canadian Utility Stocks to Buy in November

Are you looking for some top Canadian utility stocks to own? Here's a look at three must-have options for any…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is First Capital REIT a Buy for its 4.8% Yield?

First Capital is a REIT that offers you a tasty dividend yield of 4.8%. Is this TSX dividend stock a…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Passive Income: 3 Stocks to Buy and Never Sell

Stocks like Fortis Inc (TSX:FTS) are worth holding long term.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Canadian Utility Stocks to Buy Now for Stable Returns

Given their regulated business, falling interest rates, and healthy growth prospects, these three Canadian utility stocks are ideal for earning…

Read more »