The case for buy and hold over trend following.

Trend trading is an investment strategy that’s designed to allow investors to capitalize on market fluidity. Trend traders invest based on pricing trends. In the 1980s this was epitomized by Wall Street's turtle trading, in which advocates made trades based on a stock’s 20- and 55-day high and low prices. That’s a different take than index investing, which seeks to match the performance of a specific market index. It also runs counter to the strategy for investors who buy and hold, which involves buying and maintaining an investment over the long term regardless of market fluctuations. Here are seven reasons why a buy-and-hold strategy for long-term investments usually beats trend-trading systems.

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Buy and hold eliminates guessing games.

Trading strategies that follow trends as well as momentum investing, which attempts to capture the middle ground between the highs and lows of the stock market, hinge largely on timing. To use either approach effectively, trend traders must be right twice, says Michael Westbrooks, partner at WDW Financial. “They need to know the right time to get in and the right time to get out,” he says. Buy and hold, on the other hand, has no such requirement – that means investors don’t have to rely on a figurative crystal ball to structure their portfolios and this also mitigates risk.

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The case for buy and hold over trend following.

Trend trading is an investment strategy that’s designed to allow investors to capitalize on market fluidity. Trend traders invest based on pricing trends. In the 1980s this was epitomized by Wall Street's turtle trading, in which advocates made trades based on a stock’s 20- and 55-day high and low prices. That’s a different take than index investing, which seeks to match the performance of a specific market index. It also runs counter to the strategy for investors who buy and hold, which involves buying and maintaining an investment over the long term regardless of market fluctuations. Here are seven reasons why a buy-and-hold strategy for long-term investments usually beats trend-trading systems.

Buy and hold eliminates guessing games.

Trading strategies that follow trends as well as momentum investing, which attempts to capture the middle ground between the highs and lows of the stock market, hinge largely on timing. To use either approach effectively, trend traders must be right twice, says Michael Westbrooks, partner at WDW Financial. “They need to know the right time to get in and the right time to get out,” he says. Buy and hold, on the other hand, has no such requirement – that means investors don’t have to rely on a figurative crystal ball to structure their portfolios and this also mitigates risk.

It can help quell emotional decision-making.

Experts often say one of the biggest makes in choosing portfolio investments is allowing emotions to overtake rational thinking. Reining in emotions is inherent to being successful with trend following, but that’s not always easy to do. Westbrooks says it requires extreme discipline to be able to block out white noise and ignore the media distractions surrounding market movements. From a buy-and-hold perspective, that may be easier to accomplish, since the focus is meant to be on long-term results, rather than short-term blips in the market. “It’s important for investors to remember that good things come to those who wait,” Westbrooks says.

It’s easier to manage risk.

Buy and hold means building an investment portfolio based individual risk tolerance. Managing tax efficiency and minimizing fees are also key objectives. Trend following and momentum investing, on the other hand, primarily focus on matching or beating the market, which may be less appealing to the risk averse. “The human mind is not set up to ride out the volatility required to outperform,” says Matt Topley, chief investment officer at Pennsylvania-based Fortis Wealth. “Most people are psychologically built for a less volatile buy and hold diversified strategy that lessens your chance of human error.”

There’s room for personalization.

Price is a key indicator for trend trading and this strategy is less compatible when choosing investments that align with an investor’s values or preferences. The better way to build an investment portfolio is to buy and hold companies that you believe in, says Emmet Savage, chief investor and co-founder of MyWallSt. “Markets overall tend to go up so if you buy a stock you believe in and hold for years, you’re going to make money most of the time,” Savage says. “When you choose companies that have potential for growth, your investments grow with them.”

Buy and hold isn’t exclusive to stocks.

With trend following, the emphasis is on stocks. That makes it more difficult to apply this strategy to other asset classes, such as real estate. Daniela Andreevska, marketing director at real estate data analytics firm Mashvisor, says buy and hold is the best choice for real estate investment because of natural appreciation. “The long-term trend in real estate prices is always upward, even if there are ups and downs in the short and medium term,” Andreevska says. Someone who buys and holds real estate is in an optimal position to rebound from temporary dips in the property market over the long term.

It’s more cost friendly.

Making frequent trades to follow trends in the market may enhance returns but there’s a trade-off. “Trend following increases transaction costs,” says Robert R. Johnson, professor of finance at Creighton University. “Just as stock market returns compound over time, the deleterious effects of fees also compound over time.” Limiting these costs is essential for ensuring that the money being invested into the market is working as efficiently as possible. With buy-and-hold investing, fewer trades mean fewer associated fees and more returns that investors get to keep.

It favors consistency over short-term capital gains.

“The mindset that spurs investors to buy and hold is one that prioritizes sustainable, long-term returns over the quick buck,” says Robin Lee Allen, managing partner at Esperance in New York. “While active trading certainly has its place in certain subsectors, such as commodities, in general purchasing a thing that is expected to last is the most conducive to ensuring one’s economic future.” In other words, a slow and steady approach may win the race more so than attempting to dial in to any particular trend at a given moment. “Successful investing involves only one good decision,” Johnson says. “Invest early and often.”

Reasons why buy and hold works well.

Buy and hold eliminates guessing games.It can help quell emotional decision-making.It's easier to manage risk.There's room for personalization.Buy and hold isn't exclusive to stocks.It's more cost friendlyIt favors consistency over short-term wins.1 of 10

Rebecca Lake, Contributor

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

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