Thursday, September 16, 2010

You've Got to Buy 'em and Hold 'em

"You've got to know when to hold 'em, know when to fold 'em,
Know when to walk away, know when to run.
You never count your money when you're sittin' at the table.
They'll be time enough for countin' when the dealin's done."
- Kenny Rogers, The Gambler

"Tonight, I am going to share with you the secret to making money.  By knowing and applying one simple rule, you too can be rich like me."

I'm sure you have heard boasts like this before.  Usually it comes out of the mouth of some under-decaffeinated pitchman trying to sell you the latest get rich quick scheme.  In the 90's, it was how to make money from the Internet.  In the 2000's, it was how to make money buying and selling real estate (funny how you don't see too many of those commercials anymore, huh?).  Nowadays, it is how to make money in gold and silver.  However, tonight I really am going to share with you the secret to making money.  My technique is so simple that even a baby can learn it.  If you can remember three simple words, then you can make money, too.  All you have to do is repeat after me:

BUY AND HOLD

Yes, it is not as fancy as crazy option strategies or insane charting techniques, but it is proven to work.  This article on the Fidelity website describes research that compares the investment returns over the past two years of for groups of people:

Flight to Safety:  Sold all of their stock investments between October 2008 and March 2009

Fled and Stayed on the Sidelines:  Sold all of their stock investments between October 2009 and March 2009 and stayed away from stocks.

Market Timers:  Sold all of their stock investments between October 2008 and March 2009 but bought stocks again

Stayed the Course:  Remained invested in stocks throughout the past two years

If you remember your stock market history, October 2008 through March 2009 was the height of the financial meltdown.  Every day was doom and gloom:  bailouts, stocks prices dropping, layoffs, dogs and cats living together, mass hysteria.  However, a funny thing happened in March 2009.  Just as things couldn't get any worse, the sun rose again on the stock market and stocks took off like a rocket.  Anybody who sold their stocks prior to this ended up missing out on this powerful bull market.  Here is what Fidelity found when they compared the returns of people in the aforementioned four groups:



Courtesy:  Fidelity.com
 As you can see, people who held onto their stocks throughout the worst of the financial crisis actually ended making the most money.  Even people who had the courage to dip their toes back in the stock market waters ("market timers") ended up making less.  However, at least they ended up with positive gains.  The people who sold their stocks during the market crash ended up with less money than what they started with because they missed out on the rapid gains.

In a previous article, I talked about how over the long haul, the stock market has grown at an average rate of about 7% per year.  However, that assumes that you stay in stocks for the entire time:  through the good times and the bad times.  If you bail out when the going gets tough, you are going to miss out on when things get good.  Sounds a little bit like marriage, doesn't it? 

Even if you say that you will sit on the sidelines for awhile until things are looking up, you are going to miss out on some of the gains.  The funny thing about the stock market is that, historically, it jumps around in fits and starts.  Sometimes, when it goes up, it goes up quickly.  By the time you realize what is happening, it is too late.  You've already missed the elevator up.

The bottom line is that nobody knows when the stock market is going to go up or down.  Therefore it is better not to even try to predict it.  Staying the course and sticking to your plan usually is a wise option.

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