How to choose stocks to buy and hold

Choosing suitable stocks to purchase can be a challenging proposition, particularly in today’s volatile and tumultuous markets. However, many people advocate a buy and hold strategy during volatile markets since this type of investment strategy has a longer term viewpoint, making short term results less relevant. Of course, many people understand the theory of the buy and hold strategy, but are unsure of how to implement in practice.

As technology changes so rapidly, many people wonder if a buy and hold strategy is still feasible in light of today’s markets. This article provides guidance on how to implement a proper buy and hold strategy so you can acquire the best possible stocks.

What exactly is a buy and hold strategy?

According to Investopedia, a buy and hold strategy is “a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.

An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.”

Take a top down or macro approach

The best way of choosing suitable stocks to buy and hold is to get a perspective of the economy in general and choose appropriate regions, sectors or asset allocations. Personal finance websites like Seeking Alpha or The Motley Fool provide excellent advice both on macro economic analyses as well as on specific strategies involving purchasing particular stocks. 

Get a sense of what sectors you believe will perform well in the long run. Typically, investors tend to hold defensive stocks such as those in utilities, consumer staples or an index tracking ETF since these correspond well to a more risk averse strategy.

Once you have identified the parts of the world or industries that you think will outperform the market in the long run, it is time to select individual stocks.

Choosing suitable stocks

When choosing suitable stocks, one should consider several criteria, including past financial performance, potential risks to the company due to technology, legislation or other issues that could affect the company in the medium or long term.

Interestingly, non-cyclical consumer staple stocks, such as those in the tobacco industry, tend to outperform the market and also have a very low beta. Beta is defined as how volatile a particular stock is when compared to the S&P 500 or other relevant benchmark index.

As an example, Altria, a large tobacco company, was the top performing stock on the NYSE between 1957 and 2007 according to Seeking Alpha.

Companies like Johnson and Johnson, Procter and Gamble or any other large consumer staples company is also appropriate for this strategy, as they are often exposed to multiple regions and oftentimes multiple industries or verticals.  This wider exposure will give your portfolio more stability.

It’s clear there is a clear strategy one can employ to execute a successful buy and hold strategy. By following the guidance provided here, you too can execute a buy and hold strategy to help you build your portfolio.