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How Do You Choose an Investment to Hold for Five Years?
The stock market goes up and down and the business news reports every daily gain and loss as though it were a prediction for permanent success, or long term dismal failure. Pundits have likened the reporting of the stock market to an old-fashioned melodrama. Nellie is tied to the railway tracks. Will the hero get there on time? But, he is delayed. But, maybe she will get loose. Maybe the train will stop. However, agonizing over the daily fluctuations of the market is not really the best way to pick a longer term investment. Many successful investors only invest for the long term. This is typically at least five or ten years. With this in mind, how do you choose an investment to hold for five years?
Buy and Hold Investing
Investopedia defines buy and hold investing.
Buy and hold is a passive investment strategy for which an investor buys stocks and holds them for a long period regardless of fluctuations in the market. An investor who uses a buy-and-hold strategy actively selects stocks but has no concern for short-term price movements and technical indicators.
This approach need not be limited to stocks but can be used in real estate investing, the purchase of US treasuries or bonds, or in the running of your own business. This approach ignores short term static and focuses on longer term prospects. Investopedia says this in regard to the longer versus the shorter term focus.
Conventional investing wisdom shows that with a long time horizon, equities render a higher return than other asset classes such as bonds. There is, however, debate over whether a buy-and-hold strategy is superior to an active investing strategy. Both sides have valid arguments, but a buy-and-hold strategy has tax benefits because the investor can defer capital gains taxes on a long-term investments.