If you’re on social media like Twitter and Reddit, or watch financial media like CNBC, you get a heavy dose of short-term thinking every day.
It is the job of the media, as well as some posters on Twitter, to take a minute-by-minute temperature of the stock market. If the stock market is up, the media wants to tell you why. If the stock market is down, the media wants to tell you why.
If you’re a long term investor, and you’re planning to hold on to these stocks for the long term, none of that information matters to you.
Yet…it can be hard to be a buy and hold investor. Why is this?
Reason Number One: Holding Period Too Short
When people ask me if they should purchase a stock, the first question I ask them is: “How long are you planning on holding it?”
In my opinion, if you’re not planning on holding a stock for a minimum of three to five years, you should not purchase it. A year or two may not be a long enough time period to benefit from owning a stock.
Take this year for example. Suppose you purchased stock in October of 2019 with the intent to hold on to it for six months.
You would have been in for a rude awakening, because six months later saw the stock market drop 25% due to fears of the pandemic.
If you’d needed that money then, you’d likely have been down 40% or 50% on your initial investment.
A longer holding period gives your portfolio the opportunity to come back from such steep losses – and then some.
Reason Number Two: Lack Of Patience
Patience is a huge part of being able to successfully buy and hold your investment.
In this world of immediate gratification, we want to buy a stock on Monday and have it go up every day after that. That’s not how investing works!
The time it can take for an investment theme to materialize varies from a few months to a few years. For example, Netflix (NASDAQ: NFLX) went public in 2002. From 2006 to 2008, the stock was up a whopping 10%. It pretty much did nothing over three years.
I know someone personally who owned Netflix during this period, became impatient due to the lack of movement, and sold.
In 2007, Netflix introduced streaming video – which would eventually go on to be one of the biggest disrupters of our time. It took a few years to gain traction…but once it did, it went on to become one of the greatest investments of all time.
Over the next eleven years, Netflix would go up 27,200% or 272 times your money. The only way to have captured that move was to be patient and hold for the long term.
Reason Number Three: Take Profits Too Soon
If you are a long-term investor, and thinking in terms of decades as opposed to quarters, you cannot be too anxious to take profits.
If you look at some of the greatest investments of all time, the only way to capture those life-changing returns is by holding.
For example, in 2016, I bought shares in a small genetic testing company called Invitae (NYSE: NVTA) at $7.36. The stock is currently trading at $40, a return of 444%. I have no idea what will happen in the future, but I’m not thinking about selling. If the company becomes as big a winner as I believe it can, it still has a long way to go.
Is there a chance the company will not meet or exceed my expectations? Of course.
On the flip side…I don’t have enough fingers and toes to count the stories I’ve heard of investors that took profits too soon and missed out.
Reason Number Four: Try To Time The Market
Unless you’re a genius or get very lucky, it is impossible to successfully time the stock market.
What is “timing the market”? Timing the market is when you try to anticipate when the market is going to fall so you can buy, or try to anticipate when the market will go up so you can sell.
If you’re on Twitter or other social media, you’ll see tons of posts by traders who are short-term in nature, as well as some people who call themselves long-term investors, about how they time the market.
The beautiful thing about being a true long-term investor is that you don’t have to time the market.
In 2016, I bought shares of Nvidia (NASDAQ: NVDA) at $69. The stock went to $299 over the next two years. It then proceeded to go from $299 to $128, and looked as though it could fall below $100. Eventually – a year later – it went back to around $248, but the market was looking very shaky. During this time, I actually thought about selling the stock around $248 to buy it more cheaply.
As it turned out, the stock never went much lower. NVDA is sitting above $500 today.
The best choice I made was to not do anything.
Don’t try to time the market. Just buy stocks when you have the money.
Reason Number Five: Fear
If you are going to be a long-term investor, you need to understand volatility.
Over the last 50 years, the stock market has gone up two out of every three years. However, we will have times when the stock market sells off – or maybe even crashes. As a result, your stocks will go down with the market. It is not inconceivable that the market and your stocks could fall 20%, 30% or even 50%. During the dotcom bubble, the NASDAQ fell 80%.
It is very important to not get scared because of downturns. Sell-offs are a natural part of the process.
You should actually welcome them. Downturns should be looked at as stocks going on sale.
When pandemic fears hit the market in March, my portfolio lost 40% of its value in the blink of an eye. Since then, my account has more than doubled, and is now near all-time highs. It’s not because I’m smart or some sort of investing genius. It’s just that I didn’t panic.
In Conclusion…
Being a long-term investor is not easy. It’s scary at times, and boring most other times. I liken it to watching paint dry the majority of the time. However, don’t let fear or boredom distract you from your goal of becoming a long-term investor.
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)
