I see so many people get upset when the market invariably drops 300 points in a single day. We live in an age where people want instant gratificationâ€”we have microwave popcorn that takes only minutes, a VCR (or Tivo) so you never have to wait for a TV show, and the internet makes information like the lastest news instantly available. Waiting is for suckers!
So when the market drops, many people panic and begin to sell their shares, which only lock in your losses. However, the smart long-term investor knows that the perfect time to sell their shares is... never.
You may aks, "Why buy shares at all if you are not planning on selling them?" Unless you are going to live forever, you are correctâ€”since you canâ€™t take it with you, obviously you are going to want to sell some shares someday! Warren Buffet, widely regarded as the worldâ€™s most successful investor, has popularized the term â€œbuy and hold foreverâ€. Critics are quick to point out exceptions to the mantra. For example, the Nasdaq market took a tumble in 1972 to 1974. It fell 60%. (Okay, 60% is more than a "tumble"). Critics have pointed out that it took until 1980, almost six years later, for the Nasdaq to break out.
But thatâ€™s my point: if you had sold out of your position in 1974, at the bottom, you would never have recovered your money. If you had bought and held â€œforeverâ€, you would eventually have recovered your money and went on to make some pretty significant gains over the next twenty years.
Letâ€™s take that scenario and run with it: in theory, the â€œbuy and holdâ€ investor would have valued the Nasdaq as a â€œbuyâ€ in 1972 and bought a position. Then it tanked only weeks later. But instead of jumping off of a bridge, consider this. If you considered it a â€œbuyâ€ in 1972, it would have been a â€œscreaming buyâ€ in 1974, when it was selling at 60% off regular price. So, the â€œbuy and holdâ€ investor would have bought more (and not sold any). By 1980, the â€œbuy and holdâ€ investor would be considerably up as the difference between 1974 and 1980 would be positive 60%. The 1970s guy would have averaged his way to wealth.
Remember that investing is more than just buying a chunk of stock and locking it away in your attic for thirty years. Itâ€™s continually adding to your portfolio through disciplined investing, reevaluating and monitoring. â€œBuy and holdâ€ doesnâ€™t mean â€œunder any circumstancesâ€, it just means a disciplined and patient approach to investing over the long run.