Which is Better for You: Trade or Buy and Hold?

Firstly, let's explain what both strategies, in their raw forms - or strictest sense, if you like - really mean.

Buy-and-hold strategy, in its pure doctrine - almost sacrosanct to adherents at some point - requires investors to buy stocks and hold over a long term. This position is anchored in a notion that the stock market, over the long term, unfailingly turns in good returns, irrespective of the short-term swings. All that the investor needs to do, the strategy contends, is to buy and hold stocks for a long period of, say, scores of years. It wouldn't matter if the stocks lose ground at various points, even massively: true believers expect it to correct over the long-term and still yield the returns targeted by the investor. In strict buy-and-hold investing, investors bought into value companies considered rock-solid and left them over the long time horison planned for the investment.

Stock trading, on the other hand, is a short-term stock investing strategy, with stock buy-sell cycles being as short as few minutes or hours, in the extreme case. Here, the trader is tracking the constant swings of market price and looking for opportunities to earn a margin. Such margins could be low, but cumulatively, the expectation is to achieve earnings that justify the effort.

Which Way to Go?
Let's state, straight away that, at the end of the day, it's up to an investor to choose what investment strategy actually suits him. In addition, it must be stressed that the extremes of these investment styles, though seen in practice, may not be ideal for any individual investor. A position that is not at any of the extremes, in our view, may prove more beneficial. But again, that depends on the investor. What is clear is that each extreme position has its pros and cons and which outweighs the other, may be as perceived by the investor. Let's take a quick look.

Buy-and-Hold

• Old-time value-investing based strategy, hinged on the belief that certain stocks were, in the first place, almost unshakeable. Buy-and-hold investing, understandably, can only be sensible with stocks perceived as exceptionally sound. Well, the reality is that no stock can guarantee that. The best companies have some times run into rough waters, either to recover subsequently or to stay in the dustbin of history. That happened to American company Polaroid, at one time considered rock-solid investment by investors. Nigeria's Tate and Lyle was also once a major company on the stock exchane. Today, both are dead companies, buried and almost forgotten. Can you absolutely hold a stock and close your eyes because your strategy is to hold? Hardly a wise action.
• Even when a company is still healthy and performing well, nothing says better performers won't show up. If you stay tied to what you own and ignore unfolding opportunities in other stocks (assuming you have no additional funds to buy into others), are you not undermining your success?

Trading

• To start with, there are market traders and the average investor isn't. Why? Strict trading is an activity intensive operation, requiring a lot of price trend monitoring and in-and-out movements with stocks, just to take advantage of price shifts. Can you stand it? Do you have to?
• Trading requires riding on thin margins that mean that marginal price shifts could prove costly. In effect, you are really operating on the basis of minute-by-minute shifts and swings in prices. It's easy to lose money, too. Now, that's a lot of stress, don't you think? You don't have to die before the money is in you hands and trading, of the extreme type, could be bad for your health.
• Active trading is a bit complex and the ordinary investor is possibly not equipped for it. And it may not be worth the trouble to go into that, since you can still profit from the market without it. Put differently, nothing guarantees that you will do better by intense market activity. Warren Buffett captured it, though from the view-point of a fund manager: "We don't get paid for activity, just for being right".
• Trading could prove very expensive. Transaction costs are involved and unless the margins justify it, you may just be working for the stockbroker and regulators. Don't undermine your success with unjustified buy-sell cycles that only erode your overall returns.

Catch-22 Situation You Say
Not exactly. Between the two extremes, there is a wide band of investing territory where we think you can profitably pitch your tent. Don't go letting your blood pressure run up and down with daily stock price swings. You could die before you can harvest your investment and enjoy the money. That's why you need to set trigger points at which you want to do an evaluation as to whether to sell (or buy) and final limits where you must act one way or the other. Within that, you can let the market dance and save your breath. On the other hand, you can't let you investment shed substantial value and you stay glued to it because its a solid stock. No, there's no such thing, ultimately. Fortunes change. Even good companies can get complacent and lose business. It's good to wish a leading company well, but if things have turned for the worse, does your investment have to be sacrificed as well? So, strict buy-and-hold can ruin your own fortune. The trigger point again. When it hits it, sit up and ask fundamental questions. Find out what is wrong and, if there is a real issue, it's better you play safe. Why? Because you can still find equally good opportunities (meaning you really lose nothing when you exit). Besides, if you really love this company, you can buy into it again, if it succeeds in sorting itself out. Period. So, buy-and-hold or trading should remain notions and it's good to know what they stand for. But don't pigeonhole yourself. Always keep an eye, but not so much on the daily ticker. Don't turn grey charting prices - let that be for traders. And don't stay locked in until your investment goes to the dogs. It's up to you!

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