I’ve talked about this before but its something that I think is important for every stock investor to know. Currently, with so much emphasis by the media placed on trading stocks, “buy and hold” has been forgotten or never learned by many of today’s investors.
Studies have shown that the less active you are in trading your stocks, the better your performance is. In other words, someone who picks a bunch of stocks for his or her portfolio, and then dies or does nothing for years, outperforms those who are alive and active trying to manage their stock portfolio.
Here is a quote I found that explains how our emotions get the best of us and cause us to sell stocks when we shouldn’t.
Sometimes the emotion of fear forces even the best investors to sell stocks when they shouldn’t. Over my 25+ years of stock investing, I have been guilty of using fear as the main reason on many occasions to sell something that I regretted later. (my foolish sale of Facebook stock for example)
Other times investors decide to sell because they are happy with their gain, don’t want to lose any more on a stock, or are concerned that their stock will do poorly going forward. While any of these reasons may be valid, I guess the statistics show that over a long time frame, it is usually a bad decision to sell most stocks for whatever the reason. Just keep holding everything and you will likely do better than you will if you start actively trading!
Here is a chart I found that shows that the performance of average individual investors is near the bottom compared to many of the different asset classes. The act of managing their money and actively buying and selling stocks results in that underperformance.
It seems natural for individual investors like me to believe that they can earn more money by frequently making decisions about what stocks to buy (and when to sell them). It is disappointing to realize that just putting your money in an index fund that tracks the market or buying a basket of stocks and forgetting about it will probably make you more money in the end.
Its a blow to any investor’s ego to find out that a dead investor’s portfolio will outperform all the many decisions that they spend so much time making. Several readers have pointed this out to me and as a result I started buying into the S&P 500 index (SPY) with the intent on putting money into that index fund monthly. That was a great plan and I would have made a lot more money if I had followed through with it. But my emotions got in the way and I got worried about continually putting more money into a rising market. This is a perfect example of why my portfolio performance is not what it could be even though I don’t trade too often.