Buy and Hold Investing: Minimizing Friction for Long-Term Returns

Key Quotes

"First, most obviously, is fees. If you're either buying an actively managed investment or you're picking your own investments, every time you or somebody else trades, you incur those costs, and they can be very substantial, especially over the long term."

Jason Zweig argues that fees represent a significant obstacle to successful long-term investing. He explains that transaction costs, whether from active management or individual stock picking, accumulate over time and can significantly erode investment returns.

"Second is taxes. Every time you trade at a profit and you sell, you've got to pay taxes on that profit. Uncle Sam is your partner, and he's always got his hand in your pocket. If you buy and hold, you can defer most of those taxes, and often all of them, until you eventually sell."

Zweig highlights taxes as another form of "friction" that hinders investment growth. He points out that selling profitable investments triggers tax liabilities, which reduce the capital available for reinvestment and compounding. Zweig suggests that a buy-and-hold strategy allows investors to defer these tax obligations.

"So when companies earn more money that gets taxed at a somewhat lower rate thanks to legislation. So when companies earn more money that gets taxed less, their stocks go up."

Zweig explains that a combination of increased corporate earnings and a reduced tax rate contributed to the stock market's rise. He clarifies that when companies are more profitable and pay less in taxes, their stock values tend to increase.

"What markets react to is the unexpected. So when we find ourselves worrying about the things we already see, the one thing we can be pretty sure of is we're worrying about the wrong things."

Jason Zweig asserts that financial markets are primarily influenced by unforeseen events rather than predictable ones. He suggests that investors often focus their anxieties on known issues, which are likely already priced into the market, while the truly impactful market movements stem from the unexpected.

"I mean, look at the internet bubble, which not wrong, but just still a bubble. That's really the key thing here is that you can be right about how the future will unfold, but if you pay too much for the promise of that future, you're not really going to make any money doing it."

Zweig uses the internet bubble as an example to illustrate a critical investment principle. He explains that even if an investor correctly anticipates future trends, overpaying for those prospects can negate any potential gains. Zweig emphasizes that valuation is crucial, regardless of the accuracy of one's market predictions.

"So really the key is, if you want to sleep well at night, the greater the variety of assets you own, the less you should have to worry that any particular investment you own can kill you. It's a piece of what you own, it's not the whole thing."

Zweig advises that diversification is essential for achieving peace of mind as an investor. He explains that owning a wide range of assets reduces the risk associated with any single investment significantly impacting one's overall portfolio. Zweig clarifies that each asset should be considered a component, not the entirety, of an investment strategy.