Welcome back, my fellow Treehuggers! As promised in the last Tips from Pops post, we’re going to start taking a deeper dive into each of the three components that make up my personal investing approach — what I refer to as my PDQ Principles. Short, as you might recall, for Patience, Diversification, and Quality.
If you need a quick overview on the principles before we get started, take a read through my last post.
Your elders were right. Patience is a virtue.
Alright, I’m not big on dawdling. So, let’s get right into the focus of today’s post. The “P” in my PDQ Principles: Patience.
What’s the old saw: “Don’t just do something, stand there!”
Particularly among new investors, this is the best…and unfortunately, least followed investment advice.
Think about this: Back in the 1930s, the average holding period of a NYSE-traded stock was ten years. By 2010 (according to NYSE data), the average holding period had dropped to 6 months. The reasons are many — advanced computer technology among them — but plain old human impatience is also a big factor.
Why we do the things we do.
An overbought market, as we have right now, or a market that becomes suddenly volatile, can be unsettling for an investor. Some grow impatient during these times and decide that an index fund is riskier than a managed stock fund. Or, to put it simply, 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 this 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” approach. There are many reasons for it, but one biggie is that the anxious investor — when quick to sell and/or fund switch — can get dinged by potential (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 Sam (or Uncle “Grabby”, as I like to call him). And often, the resulting tax bill is greater than the perceived protection (lower risk) you believe a managed fund 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 times in our lives when necessity can trump best practices. If cash flow isn’t available, locking in gains to send a child to college, replace an old car, or even provide the basics, like food and shelter, is just what you have to do. And it’s completely understandable.
On the flip side, I’ve seen many an investor (including myself, in my younger, rowdier days) who hop on the “buy and sell” train for reasons that are much less altruistic, like:
- I have to sell (you really don’t)
- I want to sell (in which case you will find a reason)
- I really want to sell (meaning you are scared to death and any down-market move will cause you to flare like an old Canadian goose, dodging shotgun pellets above a southeast Texas rice field)
- I simply must do something (an oft-used excuse to join a thundering herd of wild-eyed Wazoo-led investors heading for the exit)
Outside of pressing financial matters, much of the reasoning investors provide to justify fund switching or 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.
Why learn from your own mistakes, when you can learn from mine?
If you feel you MUST seek financial advice, do so based on your needs, your goals and your time horizon, not on another person’s market forecast. Speaking from my own, fairly lengthy experience — listening to others and trying it out myself — it’s darn near impossible to predict the peaks and valleys of the stock market. Odds are, someone else won’t be any better at predicting major market moves than you are.
So, take it from an old guy who’s been around the block a time or two, unless you have no choice, stick with the “buy and hold” theory. If you’ve done your research and purchased quality equities in a diversified manner, patience is your best friend. Just sit back and relax. Based on the historically upward trend of the market, you’ll end up where you want to be.
And remember, too, that highly-diversified index funds can be solid investment options with a growing, long-term track record to prove it. We’ll talk about that in the next post on Diversification.
Until next time, thanks for joining us here at YM&TT. We’re real glad to have you!
Managed stock fund: the opposite of index, or “unmanaged” funds (which came around in the mid to late 1970s), managed stock funds are managed by people who buy and sell different stocks (not necessarily replicating an index) based on their research, experience, and on occasion, “feeling” about what to do.
Index fund: A low-cost mutual fund that does not attempt to beat the return of the stock market. Example: The S&P 500 Index Fund, which mirrors the S&P 500 Index by buying each of the S&P 500’s company stocks, in amounts equal to the weightings within the S&P 500 Index itself.
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 these 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.
The content on this blog is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.