Wednesday, August 26, 2009

Buy And Hold Strategy Is Nothing New

The biggest money, the largest portfolios, the greatest concentrations of wealth that have been built in real estate have come via "buy and hold" strategies.

This is hardly a new concept, and I have written about it at length. By buying "right," and holding, you take advantage of numerous positives: income, cost recovery/depreciation, equity buildup, appreciation, and leverage. And you have the further advantage of being able to utilize tax-deferred exchanges, indefinitely deferring payment of capital gains, as you move up into larger properties.

The idea of grabbing a building, or house, cheap, appeals to a segment of the buying community that, frankly, thinks smaller. They want to "flip" properties in order to pocket (hopefully) some quick cash. But they are unable to take advantage of any tax incentives that come with holding investments. Which is why, as I have said ad infinitum, this approach is not investing. It is gambling. Enough said.

But buying and holding is something that works in the stock market, as well. And interestingly, the authors of a story published at (again) seem amazed that the returns are so much higher for shareholders when they buy and hold. Rather than buy and sell.

No kidding!

Unless your stock is in free fall and in danger of becoming worthless, and not just off by a quarter or a third, you should hold on to it. In most cases it will come back. Dollar averaging . . . buying some shares at this price, and then buying some more at that price, comes back in a positive way in most instances.

There is, however, one difference in the focus on investing in stocks and holding, vs investing in commercial/investment real estate and holding. Can you guess? Yes, its the tax-deferred exchange. I think everyone should have some money in stocks -- its part of that diversification. Eventually, even in a buy and hold strategy in the market, you will divest and re-invest. BUT, you cannot sell your stocks, and re-invest in another company's shares and avoid capital gains taxes. You will pay either short-term or long-term capital gains. Not so with income producing commercial/investment real estate.

Anyway, check out the story. Its a good one regardless.

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