Last reviewed and updated on October 19, 2023 by Gabe Ross
When thinking of your investments, people tend to choose both long- and short-term strategies.
Going by historic returns, the long-term “equity stocks buy and hold” strategy has proven to generate one of the highest returns over time. With this strategy, you can also keep accumulating stocks of companies that match your investment profile and hold them for the long-term. Instead of trying to time the market, which is a risky proposition, you can practice dollar-cost-averaging. Thus, you will steadily increase the number of stocks in your portfolio, selecting those you think are long-term winners. You will also increase your gains due to the magic of compound interest, whereby your gains will start to make monies as well. (Experimenting with TipRanks’ compound interest calculator can help you understand how this works in practice.)
Another strategy that investors follow is the short-term trading strategy. However, buying and selling stocks in the short term may pose greater risks as markets may behave irrationally in the short term, especially during macroeconomic disturbances. This does not mean that longer durations are less volatile – the advantage of holding on for the long period is that an economic cycle may recover over time, and thus your investment value will also recover. Thus, a short-term trading strategy is best suitable for seasoned investors who are willing to take on additional risk.
Choosing an Ideal Investment Strategy
Formulating an ideal investment strategy is one of the toughest jobs for an investor. A variety of factors shape the decision when choosing where and when to invest. These factors include an individual’s risk-bearing capacity, investment time horizon, regularity of returns, and the expected amount of returns.
The wide range of investment options to choose from poses an additional challenge, as each possesses their own unique functionality and risk-reward. An investor can choose from stocks, bonds, government securities, fixed deposits, real estate, commodities, forex, art collectibles, etc. A novice investor may be spoiled for choices until he/she studies each option and understands the dynamics of each.
Now, let us look at why buying and holding equity stocks generates the most returns, with the help of a few examples. Using TipRanks’ Stock Comparison tool can help you research and identify the stocks that best suit your risk appetite.
# Buy and Hold – Investing in U.S. Stocks
Once you have decided to follow the buy-and-hold strategy for maximum returns, cherry-picking stocks is an altogether different ball game. There are a plethora of companies from multiple sectors that are at different growth stages and who have varied responses to market trends. Let us understand, with the help of a few examples, how the returns differ when investing in stocks from different sectors.
Suppose you had invested $1000 in technology giant Microsoft Corporation (NASDAQ:MSFT) in January 2010. Remarkably, by holding on to the MSFT stock for about 13 years and two months, you would have generated massive returns of over 732% to date (excluding dividend reinvestment). Your initial investment of $1000 would be worth $8,323.49.
What’s more, you could have even earned regular quarterly dividends by holding on to the stock. Microsoft has a dividend yield of 0.82%, which is not bad for an investor who is getting both capital appreciation and dividend income.
Now, let us consider another company from a separate sector, retail behemoth Walmart (NYSE:WMT). Assume you had invested $1,000 in WMT stock on January 4, 2010. In the past 13 years and two months, you would have earned total returns of 154.66% (excluding dividends), with a compound annual growth rate of 7.35%. Your initial investment would be worth $2,546.56. Walmart also pays regular quarterly cash dividends and has a current yield of 1.41%.
Lastly, let us look at the historical performance of another U.S. stock, the e-commerce website Amazon.com (NASDAQ:AMZN). When Amazon started its business in 1995, selling goods online was uncharted territory. Amazon was considered a disruptor then and won the first movers’ advantage. It is no secret that over the years, Amazon’s business has grown exponentially worldwide. Let us see how AMZN stock has performed in the past 13 years.
Say you invested $1,000 in AMZN in January 2010 – your investment would have generated a huge return of 1398% to date. Your initial investment would be valued at $14,980 today, in one of the best returns generated during that time frame. Amazon does not pay dividends but has earned the maximum returns in the same period as Microsoft and Walmart.
# Buy and Hold – Investing in Other Investment Options
If an amateur investor is unable to spot good individual stocks to invest in, he/she could instead buy-and-hold index-tracking exchange traded funds (ETFs). Two popular funds are the S&P 500 (SPX) and the Nasdaq 100 index (NDX).
Consider the SPDR S&P 500 ETF Trust (SPY), tracking the SPX, which has earned roughly 256% between January 2010 and March 8, 2023. Meanwhile, the Invesco QQQ Trust (QQQ), tracking the NDX, has generated approximately 551% in the same period.
Looking at investing in a safe haven asset, gold, you would have earned returns of approximately 60% in the same time frame. At the same time, if you chose to invest in high-quality, investment-grade fixed-income securities, such as the Vanguard Total Bond Market ETF (BND), you would have earned cumulative returns of 11.22% in the last ten years.
Key Takeaways
As discussed above, buying and holding equity stocks for the long term generates the maximum returns for investors. Short-term trading sometimes can prove to be highly rewarding but also carries a very high amount of risk. Any big monies earned in one short-term trading bet can easily be lost in the next trade, whereas in the long-term holding scenario, the company is able to ride through the short-term disturbances and emerge a winner at the end of the horizon when the cycle recovers. Thus, investors end up creating substantial wealth in the buy-and-hold equity stocks strategy.
You can access TipRanks’ unique platform to research and select equity stocks based on your risk-reward profile and make informed decisions.
