Don’t Just do Something - Stand There!
Exercising patience is probably one of the least followed pieces of advice out there, particularly among new investors.
Think about these statistics. Back in the 1930s, the average holding period of a NYSE-traded stock was 10 years. By 2010 (according to NYSE data), the average holding period had dropped to 6 months. The reasons are many – advanced computer technology and social media among them – but plain old human impatience is probably the biggest factor.
As mentioned in last week’s blog, we’re going to take a deeper dive into each of the three components that make up my personal investing approach – what I refer to as the PDQ Principles: patience, diversification, and quality. Because I’m not big on dawdling, let’s get right to it. The “P” in my PDQ Principles stands for Patience, which I’m told, is a virtue.
Why We Do What We Do
An overbought market (a possible scenario since the Great Recession) or a market that becomes suddenly volatile can be unsettling for investors. What is an overbought market? When folks are optimistic about the future – maybe the economy is on the upswing or there is an expected tax code revision in the works – they tend to take more risks. During such times, we see lots of buying, buying, buying in the market, and this can cause us to forget that stocks fluctuate.
Overbought markets make me think of my old amusement park experiences, where the excitement level peaked just as the roller coaster seemed to be reaching its highest point. In short, what goes up… well, you know the rest. But generally speaking, if you own quality products, recovery is imminent.
Many folks grow impatient during such times and decide that the market has exceeded their comfort level; thus, they move from a “buy and hold” mentality to “buy and sell”.
If you’ve read my earlier posts, you know where I stand on the subject. And judging by the fact that my first PDQ principle is “patience”, it isn’t hard to guess that I’m partial to the “buy and hold” strategy. There are many reasons for it, but one biggie is that the anxious investor – particularly one who is quick to sell or make trades – often gets dinged by capital gain taxes.
As you know, when you sell an investment, you either have a gain, a loss or you break even. If you sell for a gain, you’re most likely going to be paying a percentage of that gain to Uncle Grabby, as I like to call old Sam. And often, the resulting tax bill is greater than the perceived protection (reduced risk) that bailing out might offer.
To Sell or Not to Sell, That is the Question
The truth is, we don’t live in a world of absolutes, and there are moments in our lives when necessity trumps best practices. If ready cash (that rainy day fund) isn’t available, selling stock to send a kid to college, or repairing or replacing an aging vehicle, or even providing the basics like food and shelter is just what we have to do. And it’s completely understandable.
On the flip side, I’ve seen many investors (including myself, in my younger, less patient days) hop on the “buy and sell” train for reasons that are much less justifiable, like:
I have to sell (when you really don’t).
I want to sell (in which case you’ll find a reason).
I really want to sell (meaning you are scared to death and any abrupt down-market will cause you to flare like an old Canadian goose, dodging shotgun pellets above a southern Arkansas rice field).
Or worst of all, I simply must do something (an oft-used excuse to join a thundering herd of wild-eyed, Wazoo-influenced investors heading for the exit).
Outside of pressing financial matters, much of the reasoning investors provide to justify outright selling is purely psychological. The truth is, unless you are confronted with an inescapable financial need, patience is your best friend – whether you’re dealing with a temporary market downturn, the more contemporary terrorist attack, or waiting for a golden buying opportunity to present itself.
Don’t Learn From Your Mistakes, Learn From Mine
If you think you MUST seek professional financial advice, do so based on your needs, your goals and your own time horizon, not on another person’s market forecast. Speaking from my own experience – listening to others or trying it myself – it’s next to impossible to predict the peaks and valleys of the stock market. Odds are, the Wazoos won’t be any better at predicting major market moves than you.
So, take it from a fellow that’s been around the block a time or two…some say three… unless you have no choice, at least consider the “buy and hold” approach. If you’ve done your research and purchased quality products in a diversified manner, patience is your best friend. Sit back and relax.
Based on the historically upward trend of long-term markets, you’ll end up where you want to be.
And remember, too, those highly-diversified index funds can be solid investment options with a track record to prove it. We’ll talk about diversification in next week’s blog. Until then, don’t just do something, stand there!
“Even the intelligent investor is likely to need considerable will power to keep from following the crowd."