Financial advisor Donald Dirren has many years of experience helping clients manage their finances. He offers insight into one of the most popular stock market investments, typically known as “buy and hold.” While many people have become incredibly wealthy by buying certain stocks and holding on to them long-term, he notes there are two dangerous myths about this investment option that can, in a worst-case scenario, result in an investor losing vast sums of money overnight. The first myth is that investing in stable companies guarantees long-term growth, and the second myth is that “buy and hold” is always the best investment option.
Myth 1: Investing in Stable Companies Guarantees Long-term Profits
Investing in stable stock is almost always wiser than purchasing stocks in risky companies that may or may not succeed long-term, Don Dirren clarifies. On the other hand, even a company that has performed well for many years can tank and never make a recovery. Enron and Nokia, he explains, are two of many examples of such companies. Unexpected changes in modern technology, industry developments, mismanagement, and a host of other issues could cause companies to go under with little warning. Rather than buying “safe” stocks and leaving it at that, Dirren advises investors to keep track of stock performance and sell when stocks lose a pre-determined amount of value, be it 5%, 8%, or another percentage point the investor feels comfortable with. He admits that it is possible for an investor who follows this strategy to forfeit profits he would have made should the stock rise in value. On the other hand, he notes that investors who follow this principle protect themselves from potentially devastating losses.
Myth 2: Buy and Hold is Always the Best Investment Option
Don Dirren also explains that the “buy and hold” approach isn’t always the best option for all investors in all situations. Those who have the financial resources for more than one investment option may want to not only purchase buy and hold stocks but also consider day trading and/or other investment options such as bonds, precious metals, real estate, and commodities. Dirren strongly recommends discussing all the investment options with a savvy financial advisor who can provide personalized advice based on one’s short and long-term goals. While buy and hold is great for those saving up for retirement, investors need to consider present needs and plans in order to maximize their quality of life and financial savings.
Buy and hold is a great option for many investors. However, contrary to popular misconception, it is not the only safe or effective way to turn a profit. What’s more, it can put a huge strain on one’s financial resources if a person does not stay abreast of marketing happenings and set a limit at which point the stock will be sold. Safeguards and diversified investments are always in order, Dirren notes, in order to protect one’s hard-earned income while maximizing potential profits.
