Investing in stocks can multiply your wealth over time. Most of us know this. In fact, investing in a stock that returns 9% a year will double your investment in about eight years.
Most investors understand the compounding nature of the stock market. They also understand that the stock market is volatile. Returns don’t come in evenly, and an investment’s trajectory is rarely ever reflected by a straight line. A stock that averages 9% a year may go down 20% one year, then come up 36% the next year.
The worst investing mistake you can make is to sell just because a stock or fund’s price has declined. No one invests in stocks or funds that only go up. That’s not a realistic expectation of long-term portfolio management, and it shouldn’t be your goal—you will never achieve it.
Stock prices tend to decline for a reason. Perhaps the company missed its investor guidance; maybe there’s regulatory or geo-political uncertainty, or maybe commodity prices are negatively impacting earnings.
However, strong businesses can withstand the normal turbulence that the free market creates. Sometimes earnings decline, sometimes they beat expectations. If you can’t hold your investments during the declines (during the negative volatility), you won’t reap the benefits of the gains (the positive volatility).
“Be fearful when others are greedy and greedy only when others are fearful.” – Warren Buffett
Certainly, there is a time to sell. When a business can no longer generate long-term (measured over several years) growth due to a fundamental change, it can be time to sell. This is often accompanied by a dividend cut.
Unfortunately, most investors sell far too often, and significantly reduce returns. The single greatest area of improvement individual investors can make (in aggregate) is to avoid selling due to temporary price declines. WE call it having “market courage” and your advisor can help you with developing your own supply of it.
Until next time and remember:
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” – Warren Buffett
This information is not intended to provide specific tax, legal or business advice and may
not be relied upon for the purpose of avoiding any tax penalties. Lewer Financial Advisors is
a multi-state registered investment advisor domiciled in Missouri. Lewer Financial Advisors
is a member of the Lewer group of companies.