Five Reasons People Don’t Buy And Hold

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.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

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.)

 

 

Guest Post: How Bad Is The Stock Market? It’s “As Good As It Can Get”

Hello, all. Eric here. I hope that everyone is keeping safe. Today we have a guest post from Chris Pascale.

How Bad Is the Stock Market? It’s “As Good As It Can Get”

By: Christopher Pascale

When President Trump took office, the Dow Jones Industrial Average had nearly reached 20,000 points and the common sentiment was that it was time to time the market. In fact, some readers in this Retire by Forty article commented in early 2017 that they would cash out.

Having the superpower of hindsight, we know that the peace of mind that came with selling had cost potential later gains, but so long as they didn’t buy in later they are actually about where they were, meaning that the US Market is about where it was on Inauguration Day when President Trump took office, which many said was as good as it could get.

That’s how bad things are: They are so bad that they are about where they were when we thought they couldn’t get any better.

The Stock Market Today Compared to 3 Years Ago

Using this Dow Jones chart, you can see that on March 30, 2020 the average was over 22,000. When President Trump took office, it had not yet hit 20,000, otherwise thought to be a completely magical number that could perhaps note the beginning of the end of the bull market.

When the average went over 20,000 in 2017, many thought there had to be a correction coming, or even a major crash. Instead, it eclipsed 29,000 before COVID-19 took us all by surprise, “destroying the marriages of the rich”, starving the poor in India, and causing New York Suburbanites to wear facemasks even though the virus is not airborne.

Where Does This Leave Real Investors?

A person I’m close with received $150,000 in 2009 and put it into 3 Fortune 500 stocks. Prior to this crash the account grew to $400,000. Today, the account is worth $280,000.

That means the average annual growth on this account is about 6%. So, in a down time, this account has grown at a much better rate than CDs or bonds could have ever gotten.

For some more perspective – going back to the Dow Jones Chart – had this $150,000 been invested into an S&P 500 Fund when the market was at a previous height in October, 2007, right before the crash that brought us into the Great Recession, the $150,000 would be more than $210,000, bringing an annual return of about 3.2%; still better than what “safe” investments at the bank bring.

Two Conclusions In The Moment

Conclusion No. 1: First, consider those numbers above. Even if you invested into the S&P 500 at the height of the market in 2007, your returns today would average you over 3% if you never reinvested the dividends.

Conclusion No. 2: As Eric sometimes says, it might be time we start going shopping. Some companies are going to go out of business, but others are on sale.

I’m re-reviewing my purchase of Rocky Mountain Chocolate Factory (RMCF). It’s down about 50% since I bought it, but the financials show that cash on hand has remained level over the past 3 years, and they seem to have gotten LEAN with their inventory. However, total revenue and net income have gone down over the past 3 years.

I also find Ford to be interesting. Many news articles claimed that the virus was taking Ford down with it, but when I compared its daily drops to other companies, it looked like there were no material differences. This happened during the auto bailout in 2009, too. Ford didn’t need a bailout, but their stock dropped like a rock simply because they were in the auto business.

I’m not recommending you buy Ford or RMCF. In fact, the only thing I’m really recommending you buy is a little bit of perspective. Because while many feel that things are really bad right now, all I can see by way of the stock market is that it’s a little bit better than when we thought it couldn’t get any better.

Final Conclusion: How Bad Can It Get?

It should be noted that it can get much worse in the short-term. Some projections state that 20,000,000 jobs may be lost by August. If so, those with money in the market are likely to cash out to pay basic expenses – for themselves, or for loved ones with no assets to sell. The result will be share prices dropping as many sellers seek to get as much as they can from few buyers.

I won’t make any guesses about what number the Dow Jones will hit, because it could simply plateau at its current level, which, as already noted, is very good.

Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of Appeals.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

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.)