Should you trade or buy and hold an asset for minimum 20 years? Understanding ‘HODL’ and ‘Diamond Hands’

Should you trade or buy and hold an asset for minimum 20 years? Understanding ‘HODL’ and ‘Diamond Hands’

  • 23.03.2025 01:10
  • financialexpress.com
  • Keywords: No Companies

Investing in assets for at least 20 years can yield significant returns, as seen with long-term strategies employed by wealthy individuals. Holding through market volatility, rather than frequent trading, aligns with successful investor practices and economic theories like the Efficient Market Hypothesis, which favors passive investing over active management.

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Context

Analysis: Should You Trade or Buy and Hold an Asset for Minimum 20 Years?

Key Insights and Market Implications

1. Long-Term Investing vs. Trading

  • Buffett's Strategy: Warren Buffett and other top investors build wealth by holding concentrated investments (e.g., Apple, Amazon) for decades, avoiding frequent trading.
  • Trading Reality: Only 1-2% of traders consistently beat the market over the long term. Most retail traders lose money due to emotional decision-making, taxes, and fees.

2. Psychological and Financial Costs of Trading

  • Emotional Bias: Traders often chase short-term gains, leading to aggressive behavior and poor decisions.
  • Tax Implications: Selling winners triggers capital gains taxes (up to 50% in some cases), while losses are capped at $3,000 annually.
  • Hidden Costs: Frequent trading incurs brokerage fees and erodes returns over time.

3. The Power of Compounding

  • Example: Investing $1,000 in Apple stock in the early 2000s would grow to ~$700,000 over 20 years.
  • Key Lesson: Long-term holding allows wealth to compound without unnecessary interruptions.

4. Eugene Fama and Efficient Market Hypothesis (EMH)

  • Fama's Theory: Stock prices reflect all available information, making it impossible for most traders to outperform the market.
  • Passive Investing: Low-cost index funds like the S&P 500 consistently outperform active managers over time.

5. Buffett vs. Hedge Funds: The $1 Million Bet

  • Results:
    • Buffett’s S&P 500 fund gained 126% in 10 years.
    • Hedge funds averaged only 36% returns after fees.
  • Conclusion: Passive investing outperforms most active strategies over the long term.

6. Diamond Hands vs. Paper Hands

  • Diamond Hands: Investors who hold assets (e.g., Bitcoin) despite volatility and market crashes.
  • Example: Investors holding Bitcoin through 2022 bear market saw gains from $16,000 to $110,000 by 2024.

7. Risks of Long-Term Investing

  • Company Risk: Investments can fail (e.g., Enron).
  • Market Risk: Systemic downturns impact even strong assets.
  • Commodity Risk: Assets like gold or Bitcoin lack cash flow but retain intrinsic value.

8. Strategic Considerations for Retail Investors

  • Diversification: Protect wealth by spreading investments across asset classes.
  • Passive Approach: Focus on long-term growth through systematic investing (e.g., index funds).
  • Behavioral Discipline: Avoid emotional decisions and focus on compounding.

Key Takeaways

  • Long-term holding strategies outperform active trading in most cases.
  • Psychological biases and transaction costs make trading difficult for retail investors.
  • Wealth is built through patience, diversification, and compounding returns.