Which Is Better for New Investors: Active Investing or Buy and Holding?

The new wave of investors entering the market today enjoys several advantages over those who embarked on their investing journey decades ago. They can trade without incurring substantial fees that used to eat into a significant portion of their investable capital, and they have easy access to a wealth of information, ranging from raw data to advice and opinions. However, this abundance of information comes with a double-edged sword.

In the past, investing had the benefit of simplicity. High fees and limited means of tracking performance, mainly through next day’s newspaper closing prices, left most retail investors with little choice but to adopt a buy-and-hold strategy. Today, there’s a different kind of pressure, pushing investors towards active trading, even when a “set it and forget it” approach would likely be more suitable. The financial media, including major TV networks and social media, often emphasize short-term trading, with daily traders taking the spotlight.

This dynamic leads to many individuals attempting to time the market and harboring exaggerated expectations. They believe they must sell as soon as a position turns profitable, fearing an impending market downturn, and that the only opportune time to buy is after a substantial decline, such as a twenty percent drop. They look back and see that such a strategy would have yielded significant gains, perhaps fifty percent or more over the past year, and they believe that should be their goal. However, in reality, consistently nailing the exact tops and bottoms of market moves is nearly impossible, and attempting to do so often results in missed opportunities or actual losses.

So, what’s the right approach? Should investors leverage all available information and actively manage their portfolios, or should they stick with the proven buy-and-hold strategy that has stood the test of time? This question gains particular relevance now, given the significant gains in the stock market during the first half of the year, despite well-publicized risks and headlines.

Unfortunately, there’s no one-size-fits-all answer to this question, but the most practical approach usually involves a combination of both strategies. If you feel the urge to be actively engaged in trading, it’s advisable to set up a separate, small trading account while keeping the bulk of your funds invested in stocks or funds with a long-term perspective. In your short-term trading account, establish clear parameters for each trade and adhere to them, taking profits or losses when those thresholds are reached, irrespective of your emotions at the time. In your longer-term account, even if your intention is to buy and hold, you can still leverage the availability of information and ease of trading to your advantage.

I refer to this strategy as a “rolling reassessment.” It involves setting price levels, both above and below a stock’s current price, at which you reevaluate your holdings. This reassessment entails a fresh look at the fundamentals and prospects of the stock. Has the company performed as expected? Is the investment thesis that initially led to your purchase still valid? In essence, would you buy it now if you didn’t already own it? If the answer is yes, maintain your position. If not, consider realizing at least a partial profit or loss, and then reinvest that capital in something with better potential over the next year or so. However, your default inclination should always lean towards holding, and selling should only occur when something appears significantly overvalued.

Having a well-defined plan in place helps you achieve the most crucial aspect of modern investing in a media-saturated world: filtering out the noise. You will develop a habit of evaluating a stock based on what truly matters—the company’s fundamentals—and you’ll be less tempted to chase the latest hot trend just before it cools off. Simultaneously, it reduces the likelihood of passively observing as a stock with substantial gains falls out of favor or the conditions that drove its rise change, causing it to plummet.

The key takeaway here is to approach investing and portfolio management deliberately. Recognize the distinction between trading and investing and manage these positions differently. Also, acknowledge the advantage you possess over previous generations, which allows you to make informed decisions about long-term holdings. Don’t hesitate to trust your analysis and occasionally realize partial profits or losses when the situation warrants it. While these actions don’t guarantee success, they significantly increase your odds of achieving it.