January 25, 2008
Today’s post at Get Rich Slowly brings up an interesting question. Any time there’s a period of bad performance in the stock market there’s countless people asking if “now is the right time to invest”. There’s probably twice as many commenters who tell them to think long-term - but for some reason that doesn’t seem to fit in to the way they understand the stock market. I probably had similar ideas not too long ago, but now I know enough to only use stocks for long-term investments, which means there’s more good than bad in the current situation.
I think the average person who’s investing for 10 or more years but thinks now is a bad time to buy needs more than being told to ignore short-term fluctuations; they probably have some ideas about investing that are incompatible with their goals. The only way to really explain why they should ignore what happens this week is to address those ideas. What kind of misconceptions could lead to this kind of thinking? I can think of two that may have affected me in the past - fortunately before I started investing.
One is thinking that the market is broken right now and it has to fix itself before it can start making money again. This makes it sounds almost like a machine, or like one person or company is controlling everything. With all the bad news being reported it takes a lot of knowledge not to think something is wrong and the market can’t make money right now. But if you’re investing for the long term this is a good time to remind yourself that what happens in the next few weeks isn’t important and will eventually be forgotten. It’s also important to remember that the market simply reflects the opinions of everyone involved - and it frequently exaggerates opinions with some help from the media.
Another idea that might lead people astray is thinking that all losses are permanent. If you have an investment and the value goes down, isn’t it a loss that can’t be completely erased by future gains? I probably thought this less than a year ago. Of course the truth is that the current value is just the price you could sell your investment at; if you own quality stocks the situation will get much better over time. Their value will rise, but there’s always mood swings in the market that push it too high or too low for a short time. Like everything that’s driven by emotions, the price changes within a week may seem like a big deal but in a year they’ll be a distant memory and in a decade no one will remember them.
Your job is just to hold on to your investments while the value increases and then sell them at or close to the right price, which might require waiting a bit. Yes, if the bad days were erased and the good days stayed the same you would end up with more money - you would also have more money if there was a hailstorm of gold tomorrow.
What’s the right way to see it? I know the values of various investments go up and down based on how much people want them right now. I know that this value is nothing more than the price people are offering for trades today - if the price is wrong I don’t trade. I know some will always be in demand - meaning I’ll be able to sell them when I don’t want them anymore. I know people with a different focus will sometimes sell them to me or buy them from me for what I consider to be a good price (either because they have the wrong idea or because they have a different timeframe). When the prices are relatively low I just have to hold on until they go up, and buy more if I can; when the prices are relatively high it’s a good time to sell. That’s without looking at dividends and distributions, which is what the market price is ultimately based on - and doesn’t change as frequently.
Seen this way, the recent losses are anything but permanent and it’s a great time to make money. An analogy for the current events is if every January of a leap year, the majority of people suddenly couldn’t stand to own diamonds and would sell them for any price - not realizing that the next month they would go back to their regular value. You, as one of the people who can see a pattern that repeats itself over and over, stand to make a nice profit from people who can’t connect current events to past behavior.
This type of thinking might be more useful than just telling people to think about the long term without explaining why it’s always to their advantage (if they don’t need the money next year). What other types of mistaken ideas could prevent people from thinking like this?
January 31, 2008 at 10:43 pm
Stocks for the long term is risky. Its a broker way of controlling your money. What if 10 years from now the market is down. You not only have lost money, but you wasted your time. Controlling your own stocks is the best way. Try this it might help, find a company that you like. Study on it for 2 hours a week. Learn as much as you can. Until you feel comfortable. There are plenty of online brokers, that are much cheaper, and ready to help. Try not to do more than 5 stocks. This way its easier to keep track of your stocks, and you wouldn’t get over whelm. Last thing use a stop loss so you won’t lose all your money. I bet most people will be way better off. No one cares about your money more than you.
February 1, 2008 at 2:41 am
It’s hard to claim that buying and holding broad stock indexes is such a bad idea with no facts to back it up. What I think isn’t necessarily true because most people agree with it but it helps that they can point out many historical examples.
There’s some mutual funds that exist mostly for their own profit, but you have a lot of options beyond picking 5 stocks that don’t lead to a broker trying to get all your money. For example, I believe the best place to start investing in stocks is with low-cost index funds or ETFs - which can be bought at an online broker. They’re good because it doesn’t take hours of research every week to manage index fund investments that are far less risky than 5 individual companies.
And if the market is down in 10 years you haven’t necessarily wasted time. For one thing, the biggest probability of that happening would be if you bought at the peak of a bubble and the market is in the middle of a decline in 10 years. As unlikely as that is, most people would still have a lot of time to get the inevitable gains of the market. That’s also assuming you didn’t make any additional investments in the subsequent years to average down the cost.
In the unlikely event that the majority of publicly traded companies in your country actually experience a significant decline in value over the next 10 years, you’ll notice some pretty big signs other than the decline of your porfolio. It might be more likely in other countries that you invest in, but diversifying can reduce the risk a lot.
Short of that eventuality, using a stop loss is a great way to waste your money. If you need your money within a few years you don’t want to lose too much. But in that case you should look at your investments more closely during the last 5-10 years and move them to something more conservative when they’re attractively priced for selling, not when you lose money in the process.
February 2, 2008 at 7:21 am
Stop losses are one of the most important things to have. Ask the people that had Enron stock, if they wish they had a stop loss. They would at least had some of there money instead of losing it all. The number one rule in stocks is don’t lose your money. Stop losses prevent that.
5 to 10 years from now, you have no Idea what the market is going to be like. Too me that is a gamble. I have a friend that has a Mutual fund that is making 80 cents after having it for 5 years. I realize that is just one person, but I am willing to bet more people have that same mutual fund, and just wasted 5 years. Of course all funds aren’t going to lose you money. But will it be enough for retirement. I would not take that risk.
Studying and watching your own stocks. You will be way better off in the long run. No one cares about your money more than you. Why turn over your hard earned money to someone else. Just study in your spare time, and find out what works you. Stocks really are not that hard to learn. You need to read the right books, and talk to the right people for advice. Work on 1 stock for 1 hour a week, In your spare time. Always have a stop loss so you can take the emotion out of it. No one cares about your money more than you!!!
Nice talking to you.