Buy and hold, the practice of never selling your investment no matter how much money it gains or loses, is academically speaking a smart way to manage your portfolio. Smart because it removes the guess work of trying to figure out when to get out and get back into the stock market. History has shown that investors regardless of skill and experience simply can not consistently time the market. In fact, it’s commonly understood that investors will get in and out of the market at precisely the wrong time.
Therefore, a smart investor should just accept that they can not time the market and simply go along for the ride, knowing that over time the market has will go up. However, this knowledge doesn’t remove the emotional roller coaster that comes with seeing the value of your portfolio rise and fall with the markets.
Over the last 12 months ending on August 6, 2019 the market, as measured by the S&P 500 stock market index, has returned roughly 1% before adding dividends. A paltry return by any standard. In fact, it’s nearly unacceptable when you consider that to get that return you had to endure a 20% decline in the value of your portfolio.
This means a $100,000 investment in an investment that tracks the S&P 500, commonly known as an index fund, would have lost $20,000 on the way to earning $1,000 over the last 12 months. What are the emotional costs of seeing your portfolio lose so much money? The price is measured in words not currency. Fear, uncertainty, and regret come to mind. The fear that you will keep losing money. The uncertainty that you will never recover your losses, and the regret that you didn’t sell earlier.
These are the emotional costs of following a simple buy and hold strategy, and they never get any cheaper. In fact, the larger your portfolio, the greater the emotional costs. Say you invested $1,000,000 instead of just $100,000 in our previous example. Now the 20% loss is a $200,000 loss. What do you do when you’ve reached a million dollars and it’s suddenly a few hundred thousand less? What kind of mind games does that play on an investor? Would you sell if you were a millionaire and you suddenly saw you were worth $100,000 less? How about $200,000?
Many people probably would, but maybe you’d be the exception. Maybe you are the investor who believes in the long-term trajectory of the market - regardless of the price. The investor who overcomes the costly emotions of fear, uncertainty, and regret to earn the 1% gain the market returned over that 12-month period.
But if you don’t think that you are that kind of investor. The one who can endure the emotional costs of buy and hold investing. I invite you to contact us. We have developed a way to allow you to buy and hold with less emotion, less stress, and in a surprising twist more opportunity to benefit when the market is down.
Let’s talk.
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