If I had to suggest two attitudinal adjustments for the average retail investor, I would encourage patience and a little courage. Why these two?
Patience is needed for a wide variety of reasons. There is almost never a need to act quickly. If a few days matters to a decision, such that you feel that you have to act NOW, you’re probably playing the wrong game. Of course don’t dawdle when you know what you need to do, but don’t let markets, relatives or salesmen push you around.
One example of that hit me recently when I realized that I had acquired 0.1% of the market cap of a microcap stock. It rarely if ever trades, so it took three weeks to patiently source that many shares by waiting patiently on the bid price of the market. The amount I have gotten already has exceeded my expectations, but I’m still bidding for more, quietly.
I’m usually pretty patient in trading, which means occasionally some trades won’t get done. That’s okay, there are usually multiple opportunities, and alternative stocks to buy if you can’t get one of the stocks that you want at the price that you want.
Patience is also useful when the market is rising or falling quickly. Many people will get tempted to greed or fear, but someone who is patient and has his emotions under control can wait and then make a more rational decision without concern.
Patience is also needed for just maintaining an asset allocation over a long time. Remember, you don’t make money while you buy and sell, you make money while you wait. For average investors, those that are patient do best.
That is why some courage is also needed. Many investments will lose money for a time. I would estimate that 2/3rds of the stocks that I currently hold have been at a unrealized capital loss for over a month of time at some point at minimum. At present, almost all are at unrealized capital gains. So much for the bull market.
There will be a lot of people who try to scare investors. Some mean well; some don’t — they are just trying to sell you on their services. A little courage pays here. Remember that the investors that buy and hold almost always do better than traders — and this is true of all mutual funds including ETFs.
And now for something completely different
I wrote these three pieces at unpopular times:
- Buy and Hold Will Return — 2/15/2009
- Buy-and-Hold Can’t Die — 3/6/2012
- Buy-and-Hold Can’t Die, Redux — 3/7/2012
If indeed you bought and held from February of 2009, you did quite well. Even from March of 2012 you did well.
But what of now? How will you do in the future if you buy-and-hold now? I can tell you two things:
- Better than most of those that trade, and
- Likely not as well as in 2009 or 2012. In 2009, we were staring at 16%+/yr returns over the next ten years, and people were scared to death. In 2012, it was 8.5%/year for the next ten years. Now it’s around 6%.
If you were to say to me, I don’t think 6%/yr is worth playing for, you would get an ambivalent answer from me. I would tell you that I am staying in, but that you should do what you are comfortable doing, if you can avoid future panic and greed.
Though the rewards are likely lower now than previously, you still have a decent number of players that don’t believe the rally, and probably have not had a lot of exposure to the market for a while. The psychology of most people lends itself toward self-justification. If they have missed much of the rally, they are likely to pooh-pooh it now. Only a rare person would switch now, though if you saw a lot of people switching to bull mode, then it would be time to worry, and maybe, lighten up.
Personally, I don’t see it, and together with my other studies, it leads me to hold on. And guess what, that could be wrong, at least in the short-run. But when you take into account the odds of making two correct timing trades — out now, in later, and the cost of the taxes on my taxable account, the incentives for reducing equity exposure now look poor.
Back to the Beginning
That’s why you need patience and some courage. Those will steady you through the hard times. Hard times will come, and I can’t tell you when. If you want to sell a little now, go ahead, and leave it in a fund that is safe. Then set up a googlebot to track both “buy-and-hold” and “dead.” When you begin to get a lot of pings, invest the money again.
But for most of us, we will be best off maintaining a constant risk posture, because it is too hard to time the market, especially after taxes. So, be patient and little courageous.
PS — I don’t say be a LOT courageous, because I’ve seen guys make significant errors taking large chances. Remember, moderate risk wins in the end.