I’m not a big fan of losing 70% of my money by riding down a stock that I should have dumped. That’s the problem with buy and hold, it prevents you from selling investments. You always risk having the big loser. And that big loser can wreak havoc on a portfolio.
I read a story of a successful investor who, when on straight-to-the-point novice asked what this man’s secret of investment success was, replied simply, “Don’t lose.”
Take a stock that plummets from $100 to $20 per share. That’s a decline of 80 percent. But, for that stock to return to $100 per share, that price would have to rise 400 percent!
Now, take a portfolio that declines 50% (and many portfolios have declined 50% or more over the last few years). The math here is quite simple. In order to recoup your loss, the portfolio must increase 100 percent.
If you think about that in terms of time, the number of years required to recoup the loss (based on the stock market’s historical annual return of approximately 11 percent) is nearly seven. In other words, based on historical market returns, a 50% decline in your portfolio shaves roughly seven years off your investment program.
Now, while nobody wants to lose seven years off an investment program, you can afford to play catch-up if you have an investment time horizon of at least 20 to 30 years, especially if you are willing to invest more money when stocks are down.
However, if you are someone in his or her fifties or sixties, the cost of losing big is even steeper. You just don’t have enough time to make up the lost years as a result of one big hit.
Bottom line: To everything there is a reason, including selling. Volatile markets put an even greater premium on selling, as violent market moves can reduce capital gains in a surprisingly short period of time.
No comments:
Post a Comment