TL;DR: Buy and hold with index funds means regularly investing a fixed amount in a broadly diversified, cheap index fund or ETF and keeping it for a long time. Low ongoing costs matter because they come off your return every year. There is no guarantee of return and the value can fall considerably.
What can you expect?
- Time per week
- Very little: a few minutes a month for contributions and one review a year.
- Starting capital
- No large minimum; many brokers and providers allow monthly contributions from a few tens of euros. Check the minimum contribution and costs.
- Typical setbacks
- Falls of 30% to 50% that can last years, periods when your portfolio does not grow for years, and the temptation to sell out of fear.
- Costs
- Ongoing fund costs (TER), purchase costs and spread at your broker, any currency costs and tax. Compare costs between brokers.
- Not suitable if…
- Not for anyone who needs the money within a few years, cannot bear a price fall, or seeks a guaranteed return.
How it works
In buy and hold you invest a fixed amount regularly in a broad index fund or ETF (for example on a world index) and do not sell on every price move. You do not pick single stocks and do not try to time the market. The idea comes from the index-investing philosophy described by John Bogle: low costs and broad diversification. It is not a risk-free road. In 2000-2003 and 2007-2009, broad equity indices lost about half their value or more from peak to trough, and recovery took years. So you invest only money you can leave alone for a long time. Return is not guaranteed. This is educational information and not personal advice.
Core principles
- 1. Invest a fixed amount regularly (spreading over time)
- 2. Choose a broadly diversified fund with low ongoing costs
- 3. Invest only money you will not need for years
- 4. Do not sell in panic during a fall; set your rules in advance
Step-by- step plan
- 1
Build a buffer
First set aside several months of expenses in savings. That way you do not have to sell when things go wrong.
- 2
Choose a broad fund
Compare funds on index, ongoing costs (TER), size and currency. Choose a broadly diversified fund that fits your goal.
- 3
Set a fixed contribution
Set up a monthly or quarterly contribution, for example through your broker's automatic plan.
- 4
Write down your rules
Decide in advance when you will sell and how you will react to a fall. Agree a fixed review date, for example once a year.
- 5
Lower risk as your goal nears
If you need the money in a few years, move part to savings or bonds.
In detail
The idea behind index investing
An index fund follows a market, such as a world index, rather than a manager picking stocks. That keeps costs low. John Bogle, founder of Vanguard, argued for this in books such as The Little Book of Common Sense Investing. His reasoning: together everyone is the market, and after costs, on average less is left for those who pay a lot for management. Studies such as the SPIVA reports show that in many years a majority of actively managed funds lag their index, but results differ by period and market.
Costs make a difference
Ongoing costs come off your return every year and carry through to the end amount. See the worked example below: at a gross return of 7% a year, 0.03% costs give over €148,000 more at the end than 1% costs, over 30 years with €10,000 a year. This is a thought experiment, not a forecast. Also watch purchase costs, spread and currency costs at your broker.
Falls and behaviour
Investing includes periods of steep falls. In 2000-2003 and 2007-2009, broad equity indices lost about half their value or more from peak to trough. Selling during such a fall locks in the loss. So write down your rules in advance and keep a buffer so you are not forced to sell.
Choosing funds as an EU investor
Investors in the EU usually buy UCITS ETFs or funds. Many US funds are not available to EU retail investors, partly because of the PRIIPs rules. For each fund check the ongoing costs (TER), the index, the investment policy and the date of the key information document (KID). Consult belastingdienst.nl for tax on investments.
- A long horizon (preferably 10 years or more)
- A buffer in savings
- Acceptance of fluctuations and possible loss
- Account with a broker
- Automatic investment plan
- Overview of costs and tax
- 01 You first have a buffer in savings for unexpected costs
- 02 You choose a broad fund (for example a world index) and compare costs
- 03 You invest a fixed amount monthly or quarterly
- 04 You know the risks and possible loss of value
- 01 You sell when you need the money for a goal set in advance
- 02 You lower risk as your goal draws closer (for example more bonds or savings)
- 03 You do not sell purely because of a price fall or the news
Worked example
This is a hypothetical example with simple numbers. It is not a forecast: real returns fluctuate and can be negative.
You invest €10,000 per year for 30 years (total €300,000), at an assumed constant return of 7% per year. Formula: value after each year = (previous value + contribution) x 1.07 for contributions at the start of the year, or previous value x 1.07 + contribution for contributions at the end.
- Contribution at the start of each year: €1,010,730
- Contribution at the end of each year: €944,608
Below we use the end-of-year version.
Cost difference (same gross 7%, contribution at the end of the year):
| Ongoing costs | Net return | End amount after 30 years |
|---|---|---|
| 0.03% | 6.97% | €939,525 |
| 1.00% | 6.00% | €790,582 |
Difference: €939,525 - €790,582 = €148,943, about 15.9% of the amount at low costs. A 50% fall just before the end would halve the value in this example. Tax and inflation are not included.
Hypothetical example, not advice.
Work it out yourself
Risks and risk management
- Price falls: a fall of half or more has happened before and can last years
- No guarantee of return; inflation can eat your return
- You may sell in panic and lock in the loss
- Currency risk on funds in other currencies; ongoing costs and tax reduce your result
- Concentration: a single market (for example the US only) is less diversified than a world index
- Keep a buffer of several months' expenses in savings
- Do not check your portfolio daily; plan fixed review moments
- Lower risk as your goal approaches
- Compare ongoing costs, purchase costs and currency costs; consult belastingdienst.nl on tax (such as box 3)
Learn the basics
Key takeaways
- Low costs work for you every year: a 1% yearly difference costs almost 16% of your end amount over 30 years (see the worked example).
- Regular investing spreads the entry moment but does not prevent loss in a fall.
- After a 50% fall you need +100% to recover. So invest only with a long horizon.
- A history of recovery is no guarantee for the future.
Frequently asked questions
Is buy and hold suitable for Dutch investors? +
It can be, but it depends on your goal, horizon and risk appetite. Investors in the EU usually buy UCITS ETFs or funds through a broker or bank. Consult belastingdienst.nl for tax (such as box 3) and compare costs.
What do I do if the market falls 40%? +
That depends on your plan. With a fixed monthly plan you buy more units for the same amount during a fall. Selling locks in the loss. Keep a buffer so you are not forced to sell, and change your plan only if your situation changes.
When do I lower risk? +
That depends on your goal. Many investors move part to savings or bonds as they need the money sooner. That lowers fluctuations but also expected return.
Origin
Devised by / based on: John C. Bogle . Source: The Little Book of Common Sense Investing (2007)