Holding Equities for the Long Term: Time Versus Timing
Legendary investor Warren Buffett is famous for his long-term perspective. He has said that he likes to make investments he would be comfortable holding even if the market shut down for 10 years.
That’s tough for many of us — particularly when stocks do tumble for an extended period. But what does “long term” investing really mean? Depending on your stage of life, your “long term” may be different from someone else’s. So your investment strategy should take this into account. And remember: the market won’t go either up or down forever.
The power of time
In 2010, the Library of Congress released a report called “Behavioral Patterns and Pitfalls of U.S. Investors,” in which it was noted that excessive trading often causes investors to underperform the market. In short: You have a better chance of achieving a positive return in the stock market over the course of 5 or 10 years, as compared to just a single year.
Another study also showed that returns improve dramatically simply by avoiding trading during the market’s 90 worst days — but of course, predicting those days is the challenge.
That’s why patience is so important to maximizing your returns. Discipline in trading can help you stick to your long-term plans. Here are a few ways to do it:
1) Have a game plan against panic
Set predetermined guidelines that take emotion out of your decisions. These guidelines may vary depending on your circumstances, but examples include:
Deciding in advance to take your profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage
Plan to use buy-and-hold principles for most of your portfolio, and shorter-term tactical investing for others
2) Remember that everything's relative
Much of the variance in the returns of different portfolios is based on their respective asset allocations. Compare a diversified portfolio’s performance to the S&P 500 — you may find you’re doing better than the stock market as a whole.
3) Pay attention to how far you’ve come since you started
Instead of focusing on day-to-day market fluctuations, look at performance over the past year, 3 years, 5 years, and more.
4) Leverage dividends to help cushion the impact of price swings
If you’re retired, think before reacting to a downturn. If you sell stock during a period of falling prices simply because that was your original game plan, you might not get the best price. And the decision may even reduce your ability to generate income in later years.
Instead, try to adjust your lifestyle temporarily.
5) Use cash to for peace of mind
Having cash on hand makes it easier to act thoughtfully instead of impulsively, so you’re less tempted to sell stocks at a bad time just to meet day-to-day expenses.
With these tips in mind, you’ll find it easier to face market fluctuations and hold onto your investments for a longer time, through many market cycles — giving you a better chance to achieve greater returns.
Getting Sensible Advice
Not sure what steps to take with your investment plan? A Horizon Bank advisor can assess your current investments, and help you take a long-term perspective that works for your unique situation. To get started with investment planning, or to have your current plan reviewed, stop by your local Horizon Bank branch, or call 888-873-2640 today!