Since March 2009, the best investment strategy in the stock market has been to hold a basket of stocks and not let anything shake you.
Except for a cyclical bear market in 2011, the bull market has remained intact for nine years and counting. And even in 2011, the market managed to eke out a small gain.
I once heard that the stock market goes up seven out of every ten years. But during the last ten-year period, it’s gone up in eight of those years. Truly, buy and hold is having its time in the sun.
But is it always best to buy and hold?
As is often the case in complex subjects, the answer is maybe. It helps to understand exactly what we’re buying when we purchase a stock. We’re buying part ownership of a business. And there’s a significant difference between owning a small business or company and owning publicly traded shares of a company.
Let’s say I am part owner of a small local business that bakes bread for area restaurants. The business is going well, and every month I get a check for my share of the profits. The amount goes up and down, but I don’t worry because the manager is doing a great job and the profits rise over time. As long as things keep going this way, I have absolutely no reason to sell.
Let’s assume that instead of being part owner of a local bakery, I own stock in a large, publicly traded food company. Just as in my small local company, the profits go up and down each month, but the general direction is up. And instead of monthly, every quarter they send me a check for my share of the profits. This is known as a dividend. And as long as things keep going this way, I have no reason to sell.
Back in my local company, the manager retires and the new manager isn’t nearly as good as his predecessor. I decide to sell my interest, but it’s not easy to do, since there’s no ready market for my part ownership in this small business.
But in the large, publicly traded company, I can easily sell if I don’t like the new management. It takes less than a minute.
It’s a great advantage, but it also creates a deep emotional problem for most investors. The fact that they can sell at any time means that other part owners, known as shareholders, may also become concerned about their investments and choose to sell. That can drop the price. The question is, are the issues that worry other investors things I should also worry about?
Most of the time the answer is no, but not always, so the question needs to be asked whenever stock prices fall.
The reason behind most drops in share prices is headlines. Maybe the president or another powerful person did something that creates worry. Should we sell for that reason? The answer is usually no, unless you can connect that event to people’s desire to buy. And even then, we might not need to sell, because our investment is in the management of that company. Do we trust the managers to competently navigate whatever change has been set afoot? If we don’t, we probably shouldn’t have invested in the company in the first place.
But there may be company-specific reasons that some investors choose to sell. Your job as an investor is to decide if those specific reasons are a cause for concern. Sometimes the answer is easy, but not always.
Which brings us to the importance of research. When is the best time to research a company? Before you invest in it! That might seem obvious, but it’s remarkable how many people own shares of companies that they know little or nothing about. The fact that we can easily sell shares in public markets leads to a bit of laziness about investing. Most investors don’t bother researching who is running the companies they buy and what their financial condition is. Investors might be better served if they approached an investment as if they would not be able to sell it.
And there is a price to pay for being able to sell at any time—the value of your holding changes moment to moment, and those changes are all based on other people’s decisions.
So do you sell a stock because others are selling? Or do you conduct your own research and then wait for others to panic and sell irrationally, so you can scoop up the bargains they make available?
The continuous change in value is usually not related to how the company is doing but to investors’ needs and perceptions. And that can lead to irrational, sometimes unfortunate decision making.
Don’t be that person. Just because investors bid up the price of your holdings and later sell the price down, it doesn’t mean that those investments were good before and bad now.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to firstname.lastname@example.org. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.