How to Get Started with Buy & Hold Investing

Proper diversification and consistent investment discipline are keys to growing your portfolio. But, we all know that investors often make emotional decisions during market upswings, downturns, and during changing economic/political climate. Such emotional decisions usually prove counterproductive in the long run.

One way to avoid emotional decisions is to subscribe to the buy and hold strategy. Buy and hold strategy involves:

• Building a diversified portfolio


• Implementing dollar cost averaging by buying funds at regular time intervals


• Automating all your investments once the diversified portfolio is built

Building a diversified portfolio is very simple. It does not involve performing technical analysis of markets. But, rather it starts with asking few simple but important questions.

• How old am I? When do I want to retire? How much nest egg do I need to maintain my lifestyle during retirement years?


• How good is my financial foundation today?


• If my portfolio loses 50% in value, will I panic and sell my investments or will I buy more?

The answer to the first question provides the timeframe for your investment horizon. If you are younger (say in 30's), then you would have longer timeframe and you can take risks with an aggressive portfolio. But, if you are in your 40's or 50's, you won't be able to afford bigger risks. This is why you need to start investing early so that you won't need to compromise on your lifestyle when are older.

The answer to the second question provides a glimpse into your financial life. One key rule of personal finance is -- spend less than you earn. When you are spending more than you earn, you won't have any money saved. When times are good, you can get by. But, when time go tough, you will either go broke or you will need to borrow money. Borrowing money drives people into a constant cycle of monthly payments, which in turn, leads to more borrowing, and before you know it, your entire paycheck is spent with no money left over for retirement savings.

The first step in building a solid financial foundation is to figure out ways to stop this constant cycle of borrowing and spending money. When you stop this cycle, you can then focus on building an emergency fund. You should at least have 12 months of living expenses saved in an emergency fund. Once an emergency fund is built, then you can focus your energies on building a portfolio.

The answer to the third question provides a glimpse into your risk tolerance. If you answered, yes, then you need to try to answer, why. For many people, 'why' is answered with two words 'financial insecurity'. Most people feel financially insecure because they do not have a solid foundation. When you have a solid financial foundation, you won't panic when the markets go down. You would instead use that as an opportunity to buy more funds at cheaper prices. This gives you a leg up when the economy recovers and markets rebound.

These are some profound questions. I can't give you prescriptions. But, this certainly gives you some food for thought.