Holding Equities For The Long Term Time Versus Timing
Page 1 of 2
Greg Younger, CRPC®
14755 N. Outer
Chesterfield, MO 63017
Holding Equities for the Long Term: Time Versus Timing
The benefits of patience
Legendary investor Warren Buffett is famous for his long-term
perspective. He has said that he likes to make investments he
Trying to second-guess the market can be challenging at best;
would be comfortable holding even if the market shut down for
even professionals often have trouble. A study published in the
American Economic Review (quot;What Are Stock Investors' Ac-
Investing with an eye to the long term is tual Historical Returns? Evidence from
particularly important with stocks. His- Dollar-Weighted Returnsquot; by Ilia D. Di-
The Power of Time
torically, equities have typically outper- chev, Volume 97, Issue 1) showed that
formed bonds, cash, and inflation, stock investors who try to time the mar-
1-year holding periods
though past performance is no guaran- ket typically experience lower returns
tee of future results and those returns than quoted historical returns on stocks,
also have involved higher volatility. which reflect a buy-and-hold approach.
It can be challenging to have Buffett- Another study, quot;Stock Market Extremes
like patience during periods such as and Portfolio Performance 1926-2004quot;,
2000-2002, when the stock market fell done by the University of Michigan,
for 3 years in a row, or 2008, which was showed that a handful of months or
the worst year for the Standard & days account for the bulk of both market
Poor's 500 since the Depression era. gains and losses. The return dropped
5-year holding periods
Times like those can frazzle the nerves dramatically on a portfolio that was out
of any investor, even the pros. With of the stock market entirely on the 90
stocks, having an investing strategy is best trading days in history. Returns
only half the battle; the other half is also improved just as dramatically by
being able to stick to it. avoiding the market's 90 worst days; the
problem, of course, is being able to
Just what is long term? forecast exactly which days those will
be. And even if you're able to avoid
Your own definition of quot;long termquot; is
losses by being out of the market, will
most important, and will depend in part
10-year holding periods you know when to get back in?
on your individual financial goals and
when you want to achieve them. A 70- Keeping yourself on track
year-old retiree may have a shorter
quot;long termquot; than a 30 year old who's It's useful to have strategies in place
saving for retirement. that can help improve your financial and
psychological readiness to take a long-
Your strategy should take into account
term approach to investing in equities.
that the market will not go in one direc-
Even if you're not a buy-and-hold inves-
tion forever--either up or down. How-
tor, a trading discipline can help you
ever, it's instructive to look at various
stick to a long-term plan.
holding periods for equities over the Though past performance is no
years. Historically, the shorter your Have a game plan against panic
guarantee of future results, the odds of
holding period, the greater the chance achieving a positive return in the stock
Having predetermined guidelines that
of experiencing a loss. And while it's market have been much higher over a
anticipate turbulent times can help pre-
true that the S&P 500 showed a return 5- or 10-year period than for a single
vent emotion from dictating your deci-
of -1.38% for the 10 years that ended year. Calculations by Forefield Inc based
sions. For example, you might deter-
December 31, 2008, the last negative- on total returns on the S&P 500 Index
mine in advance that you will take prof-
return 10-year period before then over rolling 1-, 5-, and 10-year periods
its when the market rises by a certain
ended in 1939. between 1926 and 2008.
percentage, and buy when the market
See disclaimer on final page May 10, 2009
Page 2 of 2
has fallen by a set percentage. Or you might take a core-and- price. Moreover, that sale might also reduce your ability to
satellite approach, combining the use of buy-and-hold princi- generate income in later years. What might it cost you in future
ples for the bulk of your portfolio with tactical investing based returns by selling stocks at a low point if you don't need to?
on a shorter-term outlook. Perhaps you could adjust your lifestyle temporarily instead.
Market downturns are a test of how well you've diversified your Use cash to help manage your mindset
assets. Though diversification can't guarantee a profit or en-
Having some cash holdings can
sure against a loss, it can help you manage risk by spreading
be the financial equivalent of
it among various types of investments, some of which may be
taking deep breaths to relax. It
performing better than others.
can enhance your ability to make
thoughtful decisions instead of
Remember that everything's relative
impulsive ones. If you've estab-
Most of the variance in the returns of different portfolios is lished an appropriate asset allocation, you should have
based on their respective asset allocations. If you've got a well enough resources on hand to prevent having to sell stocks at
-diversified portfolio, it might be useful to compare its overall an inopportune time just to meet ordinary expenses or, if
performance to the S&P 500. If you discover that you've done you've used leverage, a margin call.
better than, say, the stock market as a whole, that realization
might help you feel better about your long-term A cash cushion coupled with a disciplined investing strategy
prospects. can change your perspective on market downturns. Knowing
that you're positioned to take advantage of a market swoon by
Current performance may not reflect past results picking up bargains may increase your ability to be patient.
Don't forget to look at how far you've come since you started
Know what you own and why you own it
investing. When you're focused on day-to-day market move-
ments, it's easy to forget the progress you've already made. When the market goes off the tracks, knowing why you origi-
Keeping track of where you stand relative to not only last year nally made a specific investment can help you evaluate
but to 3, 5, and 10 years ago may help you remember that the whether those reasons still hold, regardless of what the overall
market is doing. If you don't understand why a security is in
current situation is unlikely to last forever.
your portfolio, find out. A stock may still be a good long-term
Consider playing defense opportunity even when its price has dropped.
Some investors try to prepare for volatile periods by reexamin-
Tell yourself that tomorrow is another day
ing their allocation to such defensive sectors as consumer
staples or utilities (though like all The market is nothing if not cyclical. Even if you wish you had
stocks, those sectors involve their sold at what turned out to be a market peak, or regret having
own risks). Dividends also can sat out a buying opportunity, you may get another chance
help cushion the impact of price later. Even if you're considering changes, a volatile market is
probably the worst time to turn your portfolio inside out. Solid
asset allocation is still the basis of good investment planning.
If you're retired and worried about
a market downturn's impact on Be willing to learn from your mistakes
your income, think before react-
Anyone can look good during bull markets; smart investors are
ing. If you sell stock during a pe-
produced by the inevitable rough patches. Even the best aren't
riod of falling prices simply be-
right all the time. If an earlier choice now seems rash, some-
cause that was your original game
times the best strategy is to take a tax loss, learn from the
plan, you might not get the best
experience, and apply the lesson to future decisions.
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Prepared by Forefield Inc, Copyright 2009
May 10, 2009