Investing is exciting, it’s fun to pick winners and beat the market but the problem is that it’s hard, even for professionals. Professional mutual fund managers had their best year in a long time in 2017 and even then only 49% beat the market average (less than half). It’s why Warren Buffet won a bet that a basket of hedge funds couldn’t beat the market average over a five year period.
I practice boring, buy and hold investing (some call it a lazy portfolio and that’s not an insult). In spite of the evidence, I see buy and hold investing maligned all the time but it was only once I changed from trying to beat the market to a buy and hold strategy, that my net worth began increasing, and not by a little.
First a definition. Buy and hold investing is where you invest with the intention of holding onto your investments for a long time period. What buy and hold investing is not, is: buy and forget, buy and ignore, buy and hope, buy once and hold.
That last one is really the key. People who put down buy and hold investing seem to think that there is no way to take advantage of market opportunities unless you actively trade. That’s non-sense. When the market dips you can buy more, at a lower price, which is what you want to do, buy low and sell high.
The other mistake opponents of buy and hold investing make is to assume that stock and bond investing is all there is to a diversified portfolio. Well the more money you have the more you can branch out into other things such as commodities like gold and other metals, real estate, or a side business. Also don’t forget that you are your best means to diversification and should not discount your ability to increase your salary by getting promoted or changing jobs.
Since opponents of the buy and hold method often assume that stocks are your only investment they like to point out that the ten years between 2001 and 2011 were flat, a lost decade. They’re right but only if they ignore two very important things that simply can’t be ignored: dividends and dollar cost averaging. Dividends are distributions of a company’s profits to their shareholders. Dollar cost averaging is the technique of buying stock (or mutual funds) on a regular schedule regardless of the share price. The idea is that you end up buying more shares when prices are low and fewer shares at the high price. As stock or mutual fund prices fluctuate you do better than simply buying once and forgetting.
Compare the flat 10 year period above with my increase in net worth over the same period of time. The red dots indicate net worth with the green bars being assets. The scale on the left could be thousands, ten thousands, hundred thousands, or millions. The amount doesn’t matter, the increase does.
So how could the market be flat while I made significant strides? It’s because I had a plan and stuck with it. I kept contributing to my 401k every paycheck, I took advantage of drops in the market by investing my savings, and the mutual funds I owned paid dividends which were reinvested. There was nothing static about my buy and hold strategy.
I use a modified dollar cost average technique of my own. I invest at regular intervals through my 401k at work. In my personal investment accounts, I will accumulate cash and buy only on days the market is down. If the market has been rising steadily I’ll buy less often and accumulate more cash. If the market has been doing poorly and has one bad day after another, the accumulated cash allows me to buy more frequently. This technique takes discipline, there’s no doubt about that. The important thing is that I was fully invested throughout the so called lost decade and so I didn’t miss any of the gains.
The chart above showing my increase in net worth is fine but to give it a bit more perspective here is a graph showing the percentage increase in my net worth over the same period.
Please note that this does not depict my stock performance only but is an overall net worth. I feel this is a more accurate picture of all my investments, not just stocks. As you can see there were only two years that I had a loss.
None of this can be achieved without a plan and the discipline to stick with it and the more boring the better. To get a handle on your plan, head over to Embark on a Plan and begin your journey to success.