Buy or Hold: What Is the Best Approach to Stock Investing?
So, you ran into some extra money and you decided to purchase 100 shares of a stock that you’ve been following. If your intention was to leave that investment alone for a number of years, you are hoping that the share price rises dramatically (assuming it does not pay a dividend), increasing the value of your 100-share purchase. The stock’s share price (and the value of your investment) will generally change only according to the ups and downs of the overall market.
Most financial advisors, like Isakov Planning Group, will recommend a very different approach. We would rather try to ensure investment growth over time through regular, periodic purchases of additional shares. This strategy applies not only to a single company’s stock, but mutual funds as well. The reason is not always obvious. Let’s consider a simple hypothetical example.
- In January 2023, you bought 100 shares of XYZ company at $10.00 per share (i.e., the total investment value is $1,000).
- By June 2023, after first rising to $10.30, the share price dipped to $9.75 (total investment value is now $975).
- By January 2024, the share price fell a bit further, to $9.65 (total investment value now $965).
- In June 2024, the share price experienced a considerable bump, and it is now at $10.25, and the investment is now worth $1,025.
- Finally, in December 2024, the share price lifted to $10.60, with the final investment value of $1,080.
Your total investment increased by 8% over 2 years. This figure is entirely reliant on a share price increase of that amount. We call that a “bank mentality”; in other words, the initial money sits in the brokerage account and passively grows (or not). Consider that the stock price could have risen only 3%, or even decreased over that time, which would be reflected in your returns.
The Effect of Periodic Contributions
Now, consider an alternative scenario, where you made several investment contributions during this period. Say, you bought 25 shares each quarter after the initial 100-share purchase. For simplicity’s sake, we will not change the stock price each quarter—only using the share prices mentioned above. Now, let’s check out the value of the investment at each timepoint as above:
- By June 2023, you made two quarterly purchases of 25 shares apiece, first at $10.30, and then at $9.75. Your total investment value is now $1,000 + $257.50 + 243.75, or $1,501.25.
- By January 2024, the share price fell a bit further, to $9.65. With an additional two 25-share purchases of XYZ company, your total is now $1,501.25 + $241.25 + $241.25 or $1,983.75.
- By June 2024, with a share price rising to $10.25, and with two more quarterly 25-share contributions, your total is up to $1,983.75 + $256.25 + $256.25 or $2,496.25.
- By our final timepoint in December 2024, you have made two quarterly 25-share purchases at the final share price of $10.60. Your investment value is now $2,496 + $265 + $265 = $3,026.
That represents an increase in value of 300% over the same timeframe versus 8% from the first hypothetical example.
In other words, you are growing your investment in two extremely valuable ways: (1) by making frequent, regular contributions, you have propelled its value without making large contributions; and (2) you have purchased shares at lower stock prices at some timepoints, so if and when share price rises, you benefit from larger gains. This “smooths out” the effect of market ups and downs on your portfolio. We refer to this approach as an “investment mentality.”
Isakov Planning Group can help you further explore the benefits of the investment mentality approach, which is an excellent strategy in an up and down market. Contact us today for an initial free consultation!