How many people do you know who have achieved great wealth by holding their stocks for long periods of time? There are a number of these investors who achieved staggering success such as Warren Buffett. However, there are numerous reasons why I prefer income investing including covered calls to buy and hold.
“If anything, buy and hold is a completely reckless and irresponsible strategy. This is why I have always preached ‘buy and homework.’ There is nothing wrong with buying a stock with the intention of owning it for years, as long as you are willing to check up on that stock every week to make sure that your investing thesis for owning it has not fallen apart.” Jim Cramer (2007)
This is good advice from Cramer. I can add more rationale why I prefer income investing to buy and hold investing:
1 – Stocks don’t always go up
As evidence from the last decade, stock returns can be volatile. Over the last 10 years of the 2000 – 2010 decade, the S&P return was flat. if you incorporate income investing into your strategy, you are still getting that money as a return that can be reinvested for more compounding.
2- Buy and hold doesn’t produce income
Stocks just lying around the portfolio produce no cash to you except for dividends assuming the stock pays a dividend. Growth stocks may or may not be ome runs. Do you really want to tie-up your capital in an investment that doen’s produce cash flow to you? You can improve your cash return by investing in monthly dividend payers and writing calls against stock that you already own.
3- Is your timing right?
To make nice returns with buy and hold, you must be in the right stocks at the right time. You must find the stocks that will appreciate in value and buy them at the right time to get a good price. This requires a timing element in the stock market. What if you found a stock just before the economic crisis of 2008? You would have the right stock at the wrong time and lost money in the process.
If you prefer to hold a portion of long-term stocks in your portfolio, then you should consider writing calls against these stocks to generate additional income. Of course, you can add some monthly dividend ETFs to your portfolio to add more income and diversification.