Many of us are wired to seek the highest returns in the shortest period. It’s an attractive combination, and there’s no shame in aspiring to earn more for yourself and your family through a thoughtful approach to investing. But there’s a great perk to long-term investing as opposed to short-term: time saved.
Rather than checking the portfolio daily or seeking to time an entry or exit, a long-term approach allows investors to enjoy their life – with their money working and compounding for them. And rather than sitting in front of CNBC all afternoon, eschewing the human tendency to regularly check stock prices can prove to be quite fruitful.
Too much exposure to news, market volatility and investment advice may cause you to deviate from an otherwise more effective strategy: Keep calm, and buy and hold.
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Checking your portfolio doesn’t affect compounding
Let’s face it: No matter how many times we refresh our portfolios, we’re not impacting the stock price. What some of the world’s greatest investors have been rewarded for boils down to not panicking during market turmoil. As Warren Buffett has said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
This isn’t to say we should abandon our portfolios altogether. Checking in on a regular basis is an important part of investing, even if you don’t plan on selling for five years or longer. Adding and trimming positions is critical, too. But there’s no shame in taking a step back and not knowing exactly what price your favorite stock is trading at every week.
Improved technology and record increases in the number of retail investors with brokerage accounts means it’s now as easy as ever to access up-to-the-minute stock prices. But there are usually better uses of your time in the investing world, such as reading books, studying companies and strategies, or listening to podcasts.
Plus, if you’re not up for spending time and effort analyzing individual stocks, then a stock fund – either an ETF or a mutual fund, which contains a basket of multiple stocks – can be a great option. I have a mix of individual stocks and ETFs, which help me stay diversified among many positions.
By keeping a long-term view, the day-to-day, week-to-week and even quarter-to-quarter fluctuations don’t matter as much, which means you can spend less time trading and trying to time the market. In turn, this frees you up to spend more learning and living your life.
Less is more
Take it from me: When the pandemic began, I checked the markets — and my portfolios — every single day the market was open. Eventually, I burned myself out. Checking so frequently led me to sell positions too early and buy stocks I shouldn’t have. Now, about two years since the start of the pandemic, I only log into my accounts about once per month, simply to double check my holdings and dollar-cost average, or periodically purchase regardless of whether the stocks go up or down.
The volatility of the market tempts investors to trade frequently, behind the hope that they’ll time their buys and sells to coincide with peaks and troughs. But investors who trade frequently increase the likelihood that they’ll miss out on the best days in the market, and missing out on only a handful of the market’s best days in a given year has historically resulted in significantly lower returns. Inactive investors, however, ride out the short-term volatility while staying invested.
Famed economist and investor Benjamin Graham put it this way: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
Consider the opportunity cost of short-term trading
Of course, the S&P 500 index has a strong track record, but those returns came over a long period of time. In shorter periods, the market could go down substantially. This underlines the importance of holding stocks for at least five years.
It might be tempting to deviate from the long-term approach and prevent losses during periods such as early 2022, when stocks have been marked by volatility. There’s also a temptation to chase quick returns. But looking at your portfolio often, especially during such periods, offers mostly pain, with no real benefit. The continual reminder of daily losses can make a bear market harder to stomach and force you to leave a position too soon.
There’s an opportunity cost, too: If, for a month, you avoided checking stock prices, you could instead use that time to create or review your investment plan. Unlike randomly checking stock prices, reading, learning or studying your investment plan could help you in meeting your goals.
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