How often do you hear the advice to do long term investment? They say the smartest thing to do is to buy and hold because the market always come back; stay invested and you will outperform 90% of the fund managers.
Should you believe long term investing?
Long term investing seems to make sense in the first place. After all, if you want to invest for your retirement, that is for long term right? There are many empirical studies with 20 to 30 years historical data to justify this argument. It says that if you were an average investor and held a basket of index stocks, you are almost certain to make money if you stay invested for long enough.
But the truth is, the traditional way of long term investment is not suitable for most people, and it will almost always cost you a big fortune, especially in today’s market.
Here are the top 3 reasons…
To be honest, even I myself fall into this belief when I started investing. Like many people, I worshipped Warren Buffett’s tribe and tried to duplicate the same.
But over the years, I realise that there is only one Warren Buffett in the world. All those who advocate long-term investment are people who either never make long term investment themselves, or who will benefit if you leave your money with them for “long term”.
#1 People are not born to do long term investment
If you think about our ancestors, they lived in a world with danger from other animals, natural disasters, wars, etc. The genes that made our species to survive in such environments are
- Pay attention to noises
- React and flee when any sign of danger arises
If you sense some tiger in the bush, your first instinct is to run than just sitting and doing nothing right?
Now think about investing, if the stock market is crashing and the world is falling. What would you do? If you follow the convention wisdom to buy and hold, you are against your human nature.
It takes a lot of courage and willpower to stay in the market. Unfortunately sooner or later, most retail investors will give up, and regret that they did not sell earlier.
Guess how long an average investor can wait?
Yes, that is true. Research shows investors always cross that fine line from investing and into speculating. Whenever you buy a stock, you just cannot move your eyes away from the price movements.
Dalbar’s research tracks the the behaviours of average investors. By tracking retention rates of investment funds, you can tell how long people will stay with their own investments.
Based on 20 years’ analysis, an average investor can only
- Stay with equity investment (stocks) for an average of 3.41 years
- Stay with fixed income investment (bonds) for average of 3.08 years
- Stay with asset allocation investment (balanced funds) for an average of 4.56 years.
In another word, investors can “marry a long term investment”, but they cannot keep their vows for long.
#2 You have no control over long term investment
How wonderful if you can just set up a long term investment, forget it and only to reap when you retire?
In reality, this fantasy stops you from taking necessary steps to take opportunities and manage risks, it also gives you the illusion that you have control over what you are investing.
Just a decade ago, you think about Kodak when you think about taking a photo. But this 130-year-old photographic pioneer could just vanish and so was all your life savings and your faith with your long term investment of the company.
The same thing goes with Lehman Brothers, AIG, Citigroup, General Motors, Palm… Some of these “blue chip” companies may still exist, but you would have lost almost all your investments with them.
You may have heard that you can invest in a portfolio of stocks or simply buy the index ETFs to diversify your investments. Do you know until today, Japanese stock market has not recovered the crash since 25 years ago?
The truth is, no matter what you invest, the timing of investment is important.
Professional investors can trade “lousy” stock yet still make money, many retail investors buy and hold blue chip stocks but never see their wealth grow.
If you make a wrong investment decision, would you
- Admit you are wrong and move on, or
- Convince yourself that this is just a “paper loss” and hope one day market will come back?
I think it takes more courage to do the first, that is why few people succeed in investing.
#3 It is difficult to recoup after a serious loss in long term investment
Just imagine you held some “long term investment” after 5 years and it is still at a loss, what would you do?
Real loss from long term investment is almost always a painfully BIG loss. Most people who have been holding the stocks of Keppel Corporation, one of the world’s largest offshore and marine groups, would have lost more than 50% of their money.
Just think about it, if this is the blue chip stock which you bought as a “long term investment”
- How will it affect your retirement plans if it occurs before you retire?
- How will it affect your retirement if it happens after you retire?
Everyone knows the stock market has its ups and downs, but just what’s involved in recovering from a serious loss?
If you lose 50%, how much return do you need to generate just to break even?
It is not 50%, but 100%!
From the table below, you can see that the math of recovering from a loss isn’t quite that symmetrical. You have to gain more than you lost to recoup.
What is the real long term investment
If you have invested for some years, I urge you to take a look at your investment statements (probably the paper you always toss away whenever you receive it).
You may discover that some stocks, which you have held for years, are worth only a fraction of your initial investment now.
I know this because I am speaking from my own experience. I used to hold some stocks for 5 to 8 years and yet lost 90% of the value (I had got rid of all of them and moved on). Did that happen to you?
To me, the only long term investment you can have is your investment knowledge and experience that you accumulate over the years. – Ivan Guan
Back to you…
Now, either you think this article does not make any sense, or you just discover a new investment perspective for yourself. I would love to hear your opinions and you can leave your comments.
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