Buy-and-hold strategy: Definition & Examples

A buy-and-hold strategy purchases investments and keeps them over a chosen horizon rather than repeatedly trading in response to short-term price moves. In its strict no-trade form, the quantities held stay fixed, while their market values and portfolio weights change. For a quant comparing strategies, that difference is crucial: applying the original weights to every new period silently introduces rebalancing into a supposedly buy-and-hold backtest.

“Hold” does not mean the initial allocation stays intact, or that losses become impossible with enough time. It describes a holding policy. The securities chosen still determine the portfolio's exposures and risks.

No trades, changing weights

Take two hypothetical assets, A and B. Invest USD50 in each, for USD100 in total. There are no dividends, external deposits or withdrawals, costs, taxes or corporate actions. Fractional holdings are allowed. Each period's percentage changes are simple price returns, which also equal total returns here because there are no distributions.

In period 1, A rises 100% and B is unchanged:

	A value (USD)	B value (USD)	Total value (USD)
Start	50	50	100
End of period 1	100	50	150

The portfolio earns 50%. A now has weight

100/150=2/3\approx66.67\%

, and B has weight

50/150=1/3\approx33.33\%

. Nobody traded; the original equal-weighted portfolio simply drifted.

For fixed quantities $q_i$ and prices $P_{i,t}$ , the no-distribution ledger is

V_t=\sum_i q_iP_{i,t},\qquad w_{i,t}=\frac{q_iP_{i,t}}{V_t}.

Equivalently, for one holding period with start weights $w_{i,0}$ and returns $r_i$ ,

R_p=\sum_i w_{i,0}r_i,\qquad w_{i,1}=\frac{w_{i,0}(1+r_i)}{1+R_p}.

These expressions assume a fully invested, long-only portfolio with no interim trades or cash flows, and a positive ending value. If every holding becomes worthless, ending weights are undefined. Equal returns preserve the starting weights; unequal returns generally do not.

A reset changes the next period's exposure

After period 1, compare two policies. Buy and hold keeps A worth USD100 and B worth USD50. A 50/50 reset sells USD25 of A and buys USD25 of B, leaving USD75 in each. This rebalancing changes quantities but creates no immediate wealth at unchanged prices: both portfolios still total USD150.

Now suppose A falls 50% in period 2 and B stays unchanged:

Policy	A at end (USD)	B at end (USD)	Total (USD)	Cumulative return
Buy and hold	50	50	100	0%
Reset after period 1	37.50	75	112.50	+12.5%

A's doubling and subsequent halving return its price to its starting point. The buy-and-hold portfolio therefore also returns to USD100. Its second-period portfolio return is $-1/3$ , because A starts that period at two thirds of portfolio value. Compounding gives $(1+0.50)(1-1/3)-1=0$ .

The reset portfolio enters period 2 with only half its value in A. It loses 25% that period, so its cumulative return is

(1+0.50)(1-0.25)-1=12.5\%

. Calculating the average of A's and B's returns in each period reproduces this reset policy, not unchanged holdings.

USD100 starts equally in A and B and grows to USD150. With A reversing by 50%, buy and hold ends at USD100 and a reset ends at USD112.50. If A instead doubles again, buy and hold ends at USD250 and a reset at USD225.

Original synthetic two-period comparison in USD. Both policies share the first period. The reset trades only at that boundary, at unchanged prices; all other assumptions are identical. Bar lengths use a common zero-based scale.

The reversal is not evidence that rebalancing always wins. Change only period 2: let A rise another 100%, while B again stays unchanged. Buy and hold then ends with A worth USD200 and B worth USD50: USD250 in total, a cumulative gain of 150%. The reset policy ends with USD150 in A and USD75 in B: USD225, a cumulative gain of 125%. Trimming A helped before a fall and hurt before another rise. Future returns, the chosen holdings and trading costs determine the realised comparison.

SelfMadeQuant's Turnover and the Information Horizon derives the drift formula and the trading required to restore target weights in its opening sections. The public page is a preview; the full lesson requires membership.

Holding policy versus management objective

Buy and hold and passive management overlap, but they answer different questions. Buy and hold describes how an investor maintains positions. Index-based passive management seeks to follow a benchmark rather than select securities to outperform it. An investor can buy and hold a personally selected stock portfolio without tracking any index. Conversely, a passive index fund can trade to accommodate index changes, investor flows or its tracking method. The SEC's index-fund guide explains that funds may replicate all index holdings, sample them or use derivatives; passive does not mean transactions are forbidden.

There is also a level-of-analysis distinction: an investor may hold the same number of fund units while the fund trades its underlying holdings. State which holdings are being kept fixed.

For investments that pay distributions, specify whether cash is retained, paid out or reinvested. Reinvesting dividends can increase share quantities without a discretionary change in the investment selection; a total-return calculation must account for those distributions consistently. Stock splits can likewise change the share count mechanically. The strict fixed-quantity ledger above deliberately excludes both complications.

Buy and hold can reduce discretionary trading and its associated transaction costs, but it does not freeze concentration or maintain a risk target. The SEC's rebalancing guide explains why relative growth can move an allocation away from an investor's intended mix. Choosing to accept that drift, or to correct it on a stated schedule or threshold, is part of the strategy specification.

Sources

Qian, E. E., Hua, R. H. and Sorensen, E. H., Quantitative Equity Portfolio Management: Modern Techniques and Applications, Chapman & Hall/CRC, ©2007, §8.1, pp. 234–236 and §8.2, p. 236: passive weight drift and fixed-weight maintenance.
SEC Investor.gov, Index Funds: benchmark tracking, passive management and implementation methods.
SEC Investor.gov, Beginners' Guide to Asset Allocation, Diversification, and Rebalancing, “Rebalancing 101”: allocation drift, ways to restore an allocation, fees and potential tax consequences. Web sources checked 26 October 2026.

No trades, changing weights

A reset changes the next period's exposure

Holding policy versus management objective

Sources

Related terms

Equal-weighted portfolio

Passive management

Portfolio weight

Rebalancing

Transaction cost