Don’t get caught up in the details and miss the trend.
You’ve taken the plunge.
You’ve bought some shares. You felt good, like you were being proactive with your money.
You know, setting yourself up for your future.
You even downloaded the app on your phone, so you can track your investments and see how much money you’ve made!
Then one day, you’re eating breakfast, and you decide to see how your nest egg is going. You get your phone out and nearly spit out your coffee. Your heart pounds. Your stomach feels like it’s eating itself.
What happened to my money?
When your investment seems to have dropped, what you need to not do is freak out. Think back to your objectives and investment strategy before deciding what to do next – whether it’s selling, holding, or even buying more.
Markets go up and down. They have fluctuations, which can be caused by any number of factors, as well as larger cycles.
Checking your stocks is like checking your weight every day.
It sure can be tempting to check every day to see your progress, but if you get too caught up in the details, you’ll miss the overall trend.
And that brings us to the “buy and hold” investment strategy.
What is “buy and hold”?
“Buy and hold” refers to an investment strategy which is pretty much summed up in the name. You buy stocks and hold on to them through thick and thin. In sickness (downswings) and in health (upswings).
You’re playing the long game here, and therefore are taking on the risk of either ultimate failure or appreciation and profit.
Buying and holding is considered a ‘passive’ investment strategy because aside from buying the initial stocks, you’re not doing much else except waiting.
You have a few different options if you’re a passive investor. Buying into an exchange traded fund (ETF) is another one. An ETF is a managed fund that you can buy and sell on a stock exchange. ETFs track the value of an index (like the ASX 200) or a commodity, so they don’t typically try to outperform the market.
What are the benefits of buying and holding?
- You don’t have to actively manage your investment. You buy some stocks which you believe are good for the long term (or you get professional advice). Then you wait. And wait. And wait some more. Forget about them, go about your life as normal. Revisit them when you’re old!
- You can pay your tax later. Other than any tax owed on dividends (or distributions if you went for an ETF) paid to you while holding the stocks, you don’t pay any tax on that money until you take it out of the investment.
- You get decision-making power. Owning stocks is essentially owning part of that company. Shareholders get to vote on important issues (e.g. mergers, acquisitions, electing board directors). Depending on how substantial your holding is, this can be considerable power!
What about the drawbacks?
- There’s the risk of losing it all. There is a possibility that the company will perform poorly or worse go under, and you’ll lose everything you invested. If you think that’s what’s going to happen, it can seem more appealing to sell at a loss rather than lose everything.
- Losing out on potential profit. It can be argued that you lose out on potential gains by ignoring those fluctuations and not jumping on an opportunity to sell when the prices are high.
What can you do if you’re tempted to sell?
Remember why you’re here in the first place.
It’s important to avoid making investment decisions while you’re emotional, as your judgement can be impaired.
It’s also important to remember that many industries operate in cycles. They can be related to tourism or specific events, or dependent on seasons or the weather.
So before you freak out and dump your stocks back into the market, stop and think of some reasons why the stock might be doing what it’s doing.
A useful exercise is to keep an investment journal. Write down why you’re buying, what your goal is and what your reasoning was.
You can also do an ‘if this, then that’ exercise. Under what circumstances would you sell your stocks?
Referring back to this when you’re tempted to sell can help you regain your perspective and make clearer choices.
There are many investment strategies, and buying and holding is just one of them. We recommend doing your research and choosing the one that’s right for you.
