If you are invested for the long term, then buy and hold is your best option. You will want to buy stocks in very good companies and just hold them, let their price do what stock prices do – go up and down, with the overall long term direction being UP. Success comes from “TIME IN the market” not “TIMING the market”.
If you have committed to a long term plan and are investing on a regular basis, then you can start delving into buying shares that are more exciting; more specialized; in different industries and different countries, etc. First of all, please do not buy more than you can afford to lose, especially if you are buying on a “hot tip”. I have way too many stories on the big losses I’ve seen there.
Secondly, although the “when to buy and when to sell” concept sounds simple – it really isn’t.
I’ve asked many this question to many clients; “when do you buy? and when do you sell”? EVERY client had the right answer – you buy low and sell high! They didn’t say it out loud but I’m pretty sure they were wondering why I’d ask that question; it’s such a no brainer – everyone knows you buy low and sell high! Yes, everyone knows that; but remember my line “EMOTION IS THE ENEMY OF RATIONAL ARGUMENT”? Although everyone answered correctly, in reality, most people reacted VERY differently. When the markets were getting slammed (problem de jour), most want to sell and get out of the market before they “lost everything”. When things are out of control and the price of shares is way higher than their value, there is excitement and good news and no “problem de jour” , that’s when clients would come in and want to invest a lump sum.
At that point in time, it was almost guaranteed that the markets would correct themselves to a more accurate price vs value model. So the $20,000 would go down to $18,000; people quickly switch from a greed to fear mode and want to take that money out and lose $2,000! Believe me, that happened many times in my career. We are all human and therefore driven by emotion; but when it comes to investing your money, there is no room for emotion. One of the reasons we have portfolio and fund managers and financial advisers is so THEY can take the emotional part our of the equation for you.
There is another big problem with the “buy low and sell high concept”. Do you know what the high will be? The low? I’ve also had many people sit on money waiting on the low. The stock is at $50; it goes down to $45, then $40, then $35; then $30. Being very savvy and having knowledge that no one else has (NOT), they want to wait until it hits $25 so they can buy it at half price. What happens? The price of the share quickly moves back up; if the value is there, that can happen in a heartbeat. Most of the time, the stock will break through that “highest” price and continue their move to a new high. So basically, the investors has given up a 40% sale waiting on a 50% sale – and gets nothing as the sale is over.
It works the other way too. You pay $25 for a share and all of sudden it starts to move up. It goes to $30, then $40, then $50. You’ve doubled your money and it’s a great time to sell. That is true and you have done well, but if it continues to climb and gets to prices in the hundreds of dollars, you won’t be very happy that you sold (again think Amazon, Facebook, Apple, etc) . On the flipside, if you hang on at $50 counting on it getting into the hundreds of dollars and it starts moving back down, I’ve seen more than one client hang on for dear life; see it continue downward knowing that it HAS to come back (as they have this knowledge the rest of us aren’t aware of, right?) but it never does. At some point, they give up and just sell it (probably at a big loss) because it’s keeping them awake at night.
There have been many opportunities missed; opportunities that would have really enhanced their portfolios as people waited to “time the market”.
What is my point? Unless you have a crystal ball and are able to see the highs and lows of every stock, you will be much better off with a plan that outlines how much you are going to invest on a regular basis to meet your long term needs and commit to a “buy and hold” philosophy. “Buy and Hold” doesn’t mean every stock will be held forever. Things do change, and sometimes shares need to be sold. It can be due to a change in a company’s business model; a policy change that will be detrimental to their profitability, a management change, etc. It might even mean selling off one company and using the proceeds to buy a better company. Portfolio and fund managers don’t have crystal balls either, but they do have the training and education along with access to company's’ information. In my opinion, you will have better success (aka becoming richer) using their expertise as opposed to managing your own investments. You can still open your own trading account and have a bit of fun researching companies and buying and selling shares, but let that be a very small part of your overall investment plan.
Up next – Risk – are there other risks in investing?
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