RSSBuy & Hold Investing is for Underachievers
Jul 08
General, The Bible & Money No Comments
I’ve heard many financial advisors and pundits opine that people should always invest equal amounts of money into mutual funds or individual stocks at regular intervals regardless of market conditions. The idea here is that by consistently investing, you will amass wealth via the magic of compound interest over time, along with dollar cost averaging. Can this work? Yes, it can. Is this the best way to get the highest profits? No. There is a more excellent way.
For example, using the traditional buy, hold, invest regularly, compound until you’re 65 method, imagine you bought 10 shares of stock XYZ at $10 per share. You then purchased additional shares with $10 monthly. No matter the market price, you put $100 per month toward XYZ. In a normal world, XYZ would go up and down over time. If XYZ is a pretty good investment, while going up and down, the price of the stock would also trend higher over time.
Let’s say you bought your first 10 share lot in January. The stock went down to $9.95 at purchase time in February, $9.20 in March, $9.60 in April, $9 in May, $10.26 in June, $11 in July, $10.55 in August, $10.63 in September, $10.13 in October, $9.80 in November, and $11 in December.
At the end of the year, after contributing $1,200, you would have 119.3378 shares worth $1,312.72, a gain of $112.72 (about 9.39%). Not bad.
Continue for a more excellent way.
Since you’re watching the stock and the underlying company, doing research and keeping up with the news, quarterly conference calls, competition, and general market conditions, you know about what your stock is worth on the market. You can minimally predict certain behaviors of your stock…because you’re not an underachiever. You’re a certified stock stud!
You also got in the game in January at 10 shares for 10 bucks a share. When the stock dropped a nickle in February, you were unsure what caused the drop, but you were confident in your stock, so you held your position and stashed your extra $100. However, you continued to search for the reason the stock previously dropped, so when you saw it drop to $9.20 in March, you realized it was the overall market’s reaction to news that was unrelated to your company that made it fall.
You then took that opportunity to put your $200 to work at $9.20 per share. The news was still gloomy, but for some odd reason the stock jumped 40 cents in April, so instead of buying, you sold the lot you bought at the $9.20 clearance sale, bringing home a whopping $8.69 profit. In May the stock fell to $9. The stock’s story still looked good, so you bought it with the $408.69 you had from February, March, April, & May’s savings and the $8.69 in profits from the March/April flip. When The stock went up to $10.26 in June, you didn’t know if it would fly higher or keep running, so you sold a third of your position and let the rest ride. You believed the rally was for real in July, so you let your position grow and waited for a pullback to get back in. Patience is key (you learned not to get greedy and chase a hot one a long time ago when you used to day trade). You watched it drop in August, but decided to hold. You also held the next month, and passed up the chasing opportunity at $10.63, but you bought half your shares back at $10.13 in October. You didn’t go all in because it wasn’t a fire sale, but it was still low enough to still benefit from the lot you sold in June. And when it dipped to $9.80, for the first time in 6 months, you took the opportunity to put all the cash you had on hand to it before the predictable holiday season where it popped up to $11.
At the end of the year, after contributing $1200, you would have 134.62 shares worth $1,480.82, a gain of $280.82 (about 23.4%).
You may think the $168.10 difference between the two scenarios is not worth the work. And if it were only 170 bucks…one time, I would probably agree. However, when you start dealing with real money over a long period of time, the difference between 23% and 9% is staggering.
Check this out. If you took the same $100 a month and invested it consistently over 30 years (an average persons working life after their stupid 20′s) and got a 9.3% annual return, you would end up with $196,437.83.
If you invested it aggressively like the stock stud above and got a 23.4% annual return, you would end up with $5,461,861.84!
Did you see that! That’s a 5.2 million dollar difference! That’s the difference between giving a hoot if Social Security is around when you’re 65! That’s the difference between greeting guests at Wal-Mart or greeting guests to their room in your spacious paid for home!
What if I’m half wrong? You’d still end up with 2.6 million bucks! That’s still sounds about 12 times better than the old school advise!
If I said it once, I’ve said it a thousand times, “Don’t be Broke; Be Different.”
This is for the naysayers. Yes, I made up this scenario. No, I don’t expect you to find a stock to behave exactly as I’ve just laid out. However, these examples are representative of how many stocks actually perform, year in and year out.
For a real life example, check this out. I began investing in a certain stock on May 4, 2011. I watched the stock fluctuate and dance around, placing 10 trades between May 4 and July 5, 2011. I added no additional money to the stock. I just bought at what I perceived to be lows, and took profits when I perceived them to be high enough. Had I just let the stock ride untouched, I would have received a 2.24% return. But I worked harder than that and got a 12.21% return in 2 months (after trade commissions)!
That’s a difference of just under 10%. In the fake example, the difference was 11.1%. So, my fiction is pretty close to my reality.
To put my 2 month, 12.21% gain into perspective, the S&P 500 has averaged 13.66% over the last 10 years to date. I nearly matched what the market did in 10 years in 2 months!
Many financial guru’s swear up and down, that the average Joe can’t consistently beat the market. I’m here to tell you you can! I’m not talking about get rich quick, though. I’m talking about doing your homework, taking some risk, being diligent, sagacious, and patient. This is how it’s done.
The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.
Proverbs 21:5 (ESV)
Jamel Black
Personal Finance Coach