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Powerful Lessons on Buy-and-Hold Investing

You’ve heard it a thousand times: diversify and invest for the long term.  When you have money in the market, stocks, mutual funds, 401k’s, that’s easier said than done when you see banks like Lehman Brother’s failing, and the market falling by more than 500 points in a day.  The knee-jerk reaction is “oh God, the market is crashing, I better get out now!”  So, the market falls 500 points, you sell, and the next day, the market is up again.  Not only do you now owe capital gains taxes on the sale of your equities, but you just sold low, and will inevitably be buying high (or above where you sold), which is the reverse of what you should be doing.

Good investors take advantage of panic selling.  They see Monday’s 500 point panic selloff as an opportunity, hence the buying that occurred Tuesday, and again with the 450 point drop on Wednesday, and the 450 point increase today.  Buy low, see the drop as a good opportunity to get in low.  This may not be the bottom, but with value cost averaging where you increase your stock positions as the market falls, you’ll be buying in a bargain market.

I guarantee you that there are tons of average-joe investors that are crying right now because they got out of the market on Monday or Wednesday in a knee-jerk reaction, and missed today’s recovery, plus they’re possibly paying capital gains on any profits after they sold.

If you’re young and have time on your side, ride it out.   If you’re older, limit your exposure to equities.  Avoid knee-jerk emotional decisions.  Look for index funds and diversify your investments across U.S. large cap, U.S. small cap, and foreign stocks, 60%/20%/20%, respectively.

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Thursday, September 18th, 2008 at 7:42 pm and is filed under Web Business. If you like this post why not subscribe to my full text RSS feed. You can leave a response, or trackback from your own site.