3. Stay Invested (Long term) Make time your ally
“I have no idea on timing. It’s easier to tell what will happen than when it will happen.”-Warren Buffett
“You gotta know when to hold 'em, know when to fold 'em.”-Kenny Rogers
“Men are bad at investing because they rather pay whatever price for what they want before the price goes up; women might be better at investing because they tend to buy when things are on sale”
"Be fearful when others are greedy and be greedy when others are fearful." - Warren Buffett
“When the tide goes up all the boats go up and vice versa, but ultimately only the boats with holes will sink”
Make time your ally
Stock market as you know goes up and down with time, but the long term outcome is always upwards. The longer you hold on to your investments a better chance you have for that investment to grow. Businesses like the economy are always looking for a positive result, but if the economy is not going so well the best thing you can do is nothing. Invest for the long term and don’t fall for the sell low and buy high behavior.
Business cycle & Stock Market correlation...
The economy is based on the health of all companies and the health of those companies is dependent on their business cycle which can be determined by the levels of economic activity they’re experiencing:
Expansion is where the company is experiencing positive and increasing sales output. They have to hire more employees to increase supply and they increase their products price due to increased demand.
The peak is reached when the company has produced the greatest amount of output. At this point they have their highest profit margins.
The contraction follows the peak. During this phase demand actually decreases and the company begins to lay off workers. Over-supply put a downward pressure on prices and profit margins starts to fade. The low point of the cycle occurs next.
This is known as a trough and sales are low, they’re short staffed, production at its lowest. At this point they have thin profit margins.
Like the economy, the stock market is composed of public companies (the ones you can buy on the open market) which follow a very similar path as the business cycle called market cycle or sector rotation. The only difference is that the financial markets try to predict the state of the economy roughly 6 months in advance. That means the stock market could be a good leading indicator of the economy to come.
Bull Market or recovery this is when things start to pick up, the economy is showing positive signs and consumer expectations are increasing economic output. Industrial production is growing, interest rates have bottomed. Employment tends to increase (unemployment falls) and there is upward pressure placed on prices (inflation rises) as output rises. Generally speaking superior sectors include: Industrials (near the beginning), Basic materials and Energy (near the end)
The top is reached when the economy has produced the greatest amount of output, interest rates might be rising rapidly. At this point consumer expectations are beginning to decline. Industrial production is flat and employment is generally at or near its highest level (unemployment is at its lowest level: usually below the full employment rate of approximately 5%) and prices tend to rise more rapidly (inflation accelerates). Generally speaking superior sectors include: Energy (near the beginning), Staples and Services (near the end).
Bear Market or recession follows the top. Interest rates are at their highest. This is where things start to go bad for the overall economy. During this phase consumer expectations are at their worst and output actually decreases (the rate of growth becomes negative). Industrial production is falling and unemployment begins to rise and the inflationary pressure on prices fades. Generally speaking superior sectors include: Financial (near the beginning), Utilities, Cyclical and transports (near the end). The low point of the cycle occurs next.
This is known as the bottom, it is reached when unemployment tends to be at its peak and production at its low point. This is not a good time for businesses or the unemployed. GDP has been retracting, quarter-over-quarter; interest rates are falling, consumer expectations have bottomed. There is very little upward pressure on prices and in some cases there is downward pressure on prices (deflation). Generally speaking superior sectors include: Cyclical and transports (near the beginning), Technology and Industrials (near the end).
Although the financial market tries to predict the state of the economy in advance, the stock market is a better indicator of where we are in the economy cycle. With this broad sector rotation roadmap mentioned above, investors can try to assess at which stage of the economic cycle they’re in and gauge which sector will be successful in that current stage. But this would imply a very difficult thing to do: timing (when to get in and when to get out).
Remember: The market is forever swinging between unsustainable optimism and unjustified pessimism, but the fundamental cycles of the economy always repeat themselves with a good degree of regularity and always with a positive uptrend.
Time in the market, not timing
The biggest mistake people do when investing is to try to time the market. People ask me: Shouldn't you “time” your investments to coincide with what's happening with the stock market? No! Market "timing" is the worst way to invest short term or long term, because no one knows how the market will perform, if they did everyone would be rich.
It is very difficult to predict when is the best time to enter or exit the market. The speed at which markets react to news nowadays makes it very hard to compete with institutional investors. When markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the bounce. Missing out on the 10 best days of a market recovery will have left your assets in negative territory for an extended period of time.
It's “time in the market” that makes the difference — not timing! If you start investing early and take advantage of dollar cost averaging through regular investment contribution; and if you don’t over react to the market swings, then you will be way far ahead of any active manager over time.
Remember: Good years have always outweighed the bad ones.
It's all about patience
History has shown that trying to time the market is one of the worst things you can do during times of market volatility. Some people might think they can pick just the right moment to get in and out of the market, but the fact of the matter is that you are only hurting yourselves in the long run. Here's why: While markets do not go up in a straight line they have always gone up over the long term.
Now suppose that during times of market volatility you decided to get out of your investment, even if only for a few days. Since you cannot predict what the market will do day-to-day, you risk not being invested on the days where the greatest gains occur. Turning time to your advantage is one of the most effective methods of reducing risk.
The bottom line - it's all about patience. The key to superior long-term returns is not to lose sight of long-term goals.
Remember: All of an investor’s losses come from one single thing: Impatience!
WTH… Why did you Buy High and Sell Low?
Market upturns can lead to excitement and euphoria while market downturns can lead to denial, panic and the temptation to do something stupid.
Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is - or miserable just because he thinks you should be? Of course not! You would insist on your right to take control of your own emotional life, based on your experience and your beliefs. But, when it comes to their financial lives, millions of people let Mr. Market tell them how to feel and what to do, despite the obvious fact that, from time to time, he can get nuttier than a fruitcake.
Unfortunately, people get caught up in the hype and they cannot think for themselves, they are willing to buy a stock for 100X what it is worth and they are willing to sell their sinking boats just because the tide went down and not because there is a hole in the boat.
Men should ask women for investment advice… generally speaking women go crazy when there’s a 50% sale on clothes; they go shopping like the house burned down with all their shoes. Why do we do the opposite in the stock market!? When the market goes down everyone panics and sells everything they have and when things are overpriced people want to buy more.
"Stay invested" this may be one of the most often used phrase in the investment world and it is not without good foundation. Investing is a highly emotional experience; one way to avoid this human behavior trap is periodic rebalancing.
Remember: Don’t be emotional with money. Until the units of an investment are sold, a loss is only on paper - it has not been realized.
Like I mentioned before the financial markets tries to predict the state of the economy in advance, the stock market is a better indicator of where we are in the economy cycle. One way to track the stock market is to follow the indices like the S&P 500, Dow Jones, NASDAQ and the TSX. Following these indices can give great insight into which stage investors believe the economy is in.
A stock index or stock market index is a method of measuring the value of a portion of the stock market as a whole. It is computed from the prices of selected stocks (typically a weighted average) or by their market capitalization (number of shares outstanding multiplied by their current price).
The Dow Jones Industrial Average, also called the Industrial Average, the Dow Jones, the Dow Jones Industrial, the Dow 30, or simply the Dow, is a stock market index based on the 30 largest publicly owned companies based in the United States listed on the New York stock exchange (NYSE).
The NASDAQ-100, is a modified capitalization-weighted stock market index based on the 100 largest non-financial (generally technology) incorporated companies based in or out of the United States listed on the NASDAQ stock exchange.
The TSX, is a market capitalization stock market index based on about 70% of all Canadian companies listed on the Toronto Stock Exchange (TSX).
The S&P 500, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market. It is one of the most commonly followed equity indices and many consider it the best representation of the market as well as a barometer for the U.S. economy.
There has been an accelerating trend in recent decades to create passively managed investments that are based on market indices, known as index funds or exchange traded funds. Index funds routinely beat a large majority of actively managed funds. Since index funds attempt to replicate the holdings of an index, they prevent the need for extensive research and cost of buying and selling entailed in active management, and has a lower turnover rate which reduces market risk and capital gains taxes.
Remember: Market conditions may change but the secrets to successful investing remain the same: invest early, invest regularly, stay invested and diversify.
How to get there from here (Stay Invested):
The key thing to remember regarding Stay Invested is to do nothing and not fall for the sell low and buy high fear behavior.
___ Avoid changing your contribution amount (E)* or investment choices. Stick to an amount and indices types of investments. * From the “How to get there from here (Spend less than you earn)” section.
___ Before opening an investment account or starting invest for the long run in anything specific regularly, keep reading the Investment Principles section for more details.