Do buy-and-hold investing the right way.

A buy-and-hold strategy may appeal to investors who have their eye on the long game. This approach implies a certain amount of confidence that the future will be better than the present where investments are concerned. “This belief in progress has paid off for buy-and-hold investors, in spite of periodic hiccups in markets and the economy,” says Scott Knapp, managing principal, investment consulting at CUNA Mutual Group. Doing it right means avoiding some of the most common mistakes along the way. Here are eight things that can kill a buy-and-hold investing strategy.

Next:Giving in to recency bias. Credit

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Giving in to recency bias.

The market is unpredictable even on its best days, but it’s important to keep volatility in perspective. Knapp says the biggest mistake associated with buy-and-hold investing is losing heart when circumstances change for the negative and succumbing to recency bias. That involves comparing what’s happening now to something that happened recently, without considering its historical basis. “Recency bias makes investors believe current events, especially negative ones, are unprecedented and more serious than anything they’ve ever seen,” Knapp says. “That condition can compel investors to abandon their buy-and-hold strategy and cause them to miss the benefits of progress as it occurs.”

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Do buy-and-hold investing the right way.

A buy-and-hold strategy may appeal to investors who have their eye on the long game. This approach implies a certain amount of confidence that the future will be better than the present where investments are concerned. “This belief in progress has paid off for buy-and-hold investors, in spite of periodic hiccups in markets and the economy,” says Scott Knapp, managing principal, investment consulting at CUNA Mutual Group. Doing it right means avoiding some of the most common mistakes along the way. Here are eight things that can kill a buy-and-hold investing strategy.

Giving in to recency bias.

The market is unpredictable even on its best days, but it’s important to keep volatility in perspective. Knapp says the biggest mistake associated with buy-and-hold investing is losing heart when circumstances change for the negative and succumbing to recency bias. That involves comparing what’s happening now to something that happened recently, without considering its historical basis. “Recency bias makes investors believe current events, especially negative ones, are unprecedented and more serious than anything they’ve ever seen,” Knapp says. “That condition can compel investors to abandon their buy-and-hold strategy and cause them to miss the benefits of progress as it occurs.”

Emotional buying and selling.

Emotions can wreak havoc with any investment strategy, and there are two sides to the coin with buy-and-hold investing. Panic selling or buying too heavily into equities that are riding the wave can ultimately punish an investor, says Arian Vojdani, an investment strategist at MV Financial in Bethesda, Maryland. They may miss out on potential earnings or increase their exposure to volatility by not being diversified. Vojdani says it’s key to remain prudent, disciplined and diligent in a buy-and-hold strategy to avoid emotional decision-making.

Holding too long.

Vojdani says falling victim to the sunken cost fallacy can also wreck a buy-and-hold investing approach, no matter how well intentioned. “The old saying, ‘don’t fall in love with a stock’, is a good representation of the phenomenon,” he says. “The more of an investment – be it emotional or monetary – that is made into a position, the harder it is to cut your losses and sell, despite it being the rational thing to do.” This decision can be motivated by a desire to make up losses but it can end up increasing losses if the investment continues to underperform over the long term.

Forgetting to rebalance.

Rebalancing is meant to keep a portfolio aligned with the investor’s objectives and risk tolerance and it’s not something to be ignored. “The biggest mistake we see among people using buy-and-hold strategies is when the investor does not periodically rebalance a portfolio back to its original allocation between stocks and bonds,” says Ben Pace, partner and chief investment officer at Cerity Partners in New York. “Failing to rebalance can inadvertently make a portfolio riskier than the investor originally intended.” Being out of alignment could make an investor less immune to the impacts of a market downturn or poor stock performance.

Investing in companies that aren’t built for the long term.

When investing in buy-and-hold stocks or mutual funds, it’s with the belief that those investments will grow in value over time. Forgetting to check under the hood and review a company’s fundamentals can run counter to that belief. “You want to make sure you aren’t investing in a company that is making a product that has no long-term viability,” says Mark Farnan, president of retirement income planning in Madison, Wisconsin. Farnan says there needs to be a future market for the product for it to be an appropriate buy-and-hold pick. “Even if the company is in good financial standing but has a product that isn’t needed it may be time to move on and look elsewhere,” he says.

Not understanding risk tolerance.

Risk tolerance seems like a simple enough concept but it’s something buy-and-hold investors don’t always take time to thoroughly understand. That can lead to missteps with investment choices and decision-making that could siphon away returns. Eric Aanes, president and founder of Titus Wealth Management, says that can be avoided by creating a plan that spells out investors’ risk tolerance with an income analysis if they’re drawing dividends or other income from their portfolio. “This assures that they have a game plan and will help them stick to the plan when extreme volatility hits,” Aanes says.

Trying to time the market.

Attempting to get market timing right can be a waste of time and take the focus off what investors should be doing with their portfolios. “Investors need to pick the right time to get out of the market and the right time to get back in,” says Michael Sheldon, executive director and chief investment officer at RDM Financial – Hightower Advisors. “Even the smartest, most experienced institutional investors have trouble doing this consistently over time.” Sheldon says this approach might offer a near-term gains boost but work against a buy-and-hold investor over time. The better approach requires due diligence, continuous monitoring of investments and focusing on the bigger picture.

Tapping assets prematurely.

A buy-and-hold strategy only works if investments can compound for years, if not decades, says Stephen Caplan, financial advisor at Neponset Valley Financial Partners in Boston. “Your goal as an investor should be to minimize the chances that you’ll be forced to sell your assets at any point.” Caplan says investors can avoid having to dip into their long-term investments by establishing adequate emergency savings and disability insurance to protect their income if they become sick or injured. Those kinds of safety nets can allow investments the room they need to grow.

Avoid these buy-and-hold investing errors:

Giving in to recency bias.Emotional buying and selling.Holding too long.Forgetting to rebalance.Investing in companies that aren’t built for the long term.Not understanding risk tolerance.Trying to time the market.Tapping assets prematurely.1 of 11

Rebecca Lake, Contributor

Rebecca Lake has been writing about personal finance and business for nearly a decade. In ...  Read more

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