Over the last couple of years, I’ve seriously changed my investing philosophy. I love the thrill of short term and day trading, but I realized that it’s never going to make me much money. Instead, I’m trying to make long term, strategic investments, where I love the company no matter what the price says.
[Note: I realize the blog name no longer matches the way I invest, but I think it sounds way better than “The Long Term Invest-ette.”]
Almost all of my investing regrets are from selling an investment too soon. At one point I was holding Apple (AAPL) below $400 ($57 post-split), Netflix (NFLX) below $200, and Facebook (FB) in the $30s. I could have doubled my money, but instead I sold in early to lock in small gains, or panicked when the stock price crashed, and sold it all at a loss.
Studies show that this is actually very typical behavior for investors. We tend to sell when the market is dropping, only to lose out when it rallies back up. That’s why I recommended no one panic or sell all your investments when the market dropped in October. In the long run, you tend to be better off just riding the waves of the market (excuse the analogy, I’m blogging by the beach at the moment).
The reason is, the market tends to have great rallies after a dip. Pulling out during a dip, and therefore missing the good market days, can negatively impact your returns over time. JPMorgan Asset Management found that if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would’ve had a 9.2% annualized return. However, if selling investments resulted in missing just the ten best days during that same period, then those annualized returns would drop to 5.4%.
Granted, ideally you would sell right before the correction and buy again right before the rally. But unless you’re psychic, that’s going to be pretty hard to pull off. Your next best bet is not to sell during the correction.
Now, I’m holding a long term investment portfolio of companies I think have strong growth potential. For example, I’m
holding solar companies, and I don’t care that I’m losing money on them right now, because I think in a few years they will take off. I’m trying to focus on the big picture and not the day to day gains or losses.
Don’t get me wrong, I’ll still engage in some short term trading or earnings plays every now and again, and I’ll probably still write about them on the blog. I think they’re too fun to give up entirely. But they’re going to be a very, very small portion of my portfolio.
This is just my personal plan, and you should follow whatever investing strategy you think works best for you and your financial situation. But I think it’s a good idea to have a clear sense of your strategy before you start investing your money.
On another note, the blog is going to be a little sparse for the next two weeks, as I’m on vacation until after the new year. I’ll try to check in when I can. In the meantime, happy holidays to everyone!