I’m often asked how long I expect to hold on to a stock. My answer is that, ideally, I plan on holding most stocks indefinitely … but I’m always vigilant in looking out for circumstances that might make that term a little shorter.
In short, it’s the well-worn strategy called “buy and hold,” which is built on two simple concepts:
- An investor identifies companies in which to invest for any number of reasons — business model, financial strength, product niches, “wide moats” — and holds those investments for the long-term as the companies grow, delivering capital appreciation and (hopefully) throw off dividend income, too.
- Markets work in cycles, and given time, the proven outcome for investors is that stocks outperform bonds and any other investments over the long haul.
However, while the purest form of buy and hold might be “setting it and forgetting it,” it’s foolish to buy a stock you like, then ignore it forever.
Although buy and hold is among the most passive of investing strategies, even devout B&H’ers have to be able to act … just as long as they don’t lose track of the long-term view.
Here are three ways you should “actively” manage your buy and hold strategy:
Buy More When You Can
You’ve done the research and bought into a fabulous lifelong holding like Exxon Mobil (XOM) or Procter & Gamble (PG), and now you just want to sit back and collect dividends.
That’s not a bad play, but if you believe in the stock long-term, and the reasons for believing hold up over time, you should actively look to buy more of the stock whenever it hits a rough patch. Dips — especially those caused more so by general market malaise than company-specific issues — are perfect buying opportunities.
For instance, during the financial crisis, had you been holding XOM, you could have sold out in fear — or if you believed that it’d be ludicrous to think Exxon Mobil was just going to evaporate, you could have bought in at less than $60. Today, it’s trading near $90. Procter & Gamble stock was available for just more than $50 and has nearly doubled over that same period. Not to mention, you’d also be sitting on an excellent yield on cost for both stocks.
Reinvest Your Dividends
This is one of the most proactive strategies you can employ to bolster your holdings in your long-term favorites with just about the least amount of effort required.
It’s fairly simple: Enroll in any Dividend Reinvestment Program (DRIP) available for those favorite long-term holdings. You usually can get started either through your brokerage company or directly through the company itself. Yahoo Finance has a great primer on DRIPs here.
DRIPs offer perhaps the best income averaging investment vehicle, since your contribution goes into buying shares at whatever prices the stock trades at on the purchase dates. It’s also flexible: If you decide you’d rather take the dividend as cash income, opt out and start collecting.
Coca-Cola (KO) and 3M (MMM) are among a solid list of companies that offer DRIP programs.
Secure Your Money
While you should actively look for ways to add to your holdings, it’s not a sin to sell, either.
For one, if something major occurs that truly changes the nature of one of your long-term holdings, and upon evaluation, you don’t believe it to have as solid a future as you once did, get out. Patience will be rewarded … but not blind faith.
That said, selling stock doesn’t mean you’re abandoning your principles or have no faith in the company. For some, it’s just a disciplined approach to take toward stocks that have become noticably frothy in valuation, and it can help secure funds with which you can further diversify your buy-and-hold strategy.
Apple (AAPL) is a personal example I look back at often. I bought AAPL for the long-term, but looking back, I should have taken advantage of last year’s meteoric rise to $700, either by selling some (not all) shares outright, or setting higher stop-losses as Apple aggressively rode trader momentum higher so I could lock in profits in case emotions soured (which they did). I still think Apple is a good long-term holding, but those profits could have been used toward securing other long-term holdings — possibly even more AAPL earlier this year when its valuation looked more appealing.
Jeff Reeves advocates for taking some money off the table in five of the most stalwart of dividend-paying stocks around, including companies like Cisco (CSCO) and Walmart (WMT). It’s not a condemnation of the companies, just smart management.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL and XOM.