I'll show you why it's useless to fear a market crash
Armageddon here, slump there. Recession, crash, bearmarket. We hear them a lot. But in fact, I don't think there's any need to worry about any of that. I'll show you a few reasons.
Most people see the stock market as a giant roulette wheel, where some people have a system that allows them to recognize that brilliant buy that will make it so they never have to do anything again. And some people may be good at it, but the reality is that most people don't make money investing or get rich by being smarter than the system.
In fact, chasing short-term gains is about like betting. And the secret isn't finding brilliant investments In fact, it's identifying good companies with strong long-term growth plans.
The problem - and it's a big one - is that trading is exciting and investing is boring. Buying $BRK-B just doesn't sound as appealing as watching charts on six monitors all day and making trade after trade. Moreover, long-term holding has historically worked very well.
And I'll illustrate this with a current example. Bank failures are, of course, a terrible thing that can say something about the broader economy. But when you look at your portfolio, you should look at every stock you own and ask: Does this news change my thesis for this stock?
Your thesis is the reason you own that company's stock. It shouldn't be the price point, what the chart says, or the fact that someone you know told you something positive about the company. You should have a clear reason why you own the company's stock. For example, I own shares in a car company because I believe their cars will be around for a long time. They have good management that will keep margins high and do everything they can to return value to shareholders. Not because a friend recommended it to me.
And even the stats show that long term holding rules.
There are many statistics and studies that show that long term investing is better than short term investing or speculating in the market.
- The long term average stock market return is around 7-10% per year. This means that long-term investors who hold their investments for many years have a high probability of achieving high returns.
- A Vanguard study showed that the average return for long-term investors in index funds was 6.1% per year from 1926-2018, while the average return for short-term investors was only 2.9% per year.
- Another study showed that 90% of stock returns come from holding an investment for 10 years or longer. This means that short-term investors who buy and sell frequently may lose a significant portion of potential returns.
- Long-term investing also reduces the risk of market fluctuations. For example, during the 2008 financial crisis, the stock market fell by more than 50%, but investors who held their investments for the long term were able to recover and recoup their lost profits.
- Finally, long-term investments also allow investors to take advantage of the compound interest effect. This means that investment returns are reinvested and generate more and more profit with each passing year.
But let's not paint everything so black. There is only risk when individuals take too much risk and put their financial position at risk. This is the main disadvantage of trading versus investing. Here's an example of how volatile trading and stock picking returns can be. GameStop - Investors who bought shares of GameStop on January 27, 2021 would have lost nearly 55% of their investment by April 21, 2021. The total return of the S&P 500 Index during this period was nearly 12%. If you had bought GameStop stock just one day earlier, you would have actually had a 7% gain versus the nearly 9% gain of the S&P 500 Index. And buying the stock on January 1 and selling it on January 27 would have yielded a whopping 1,740% return versus the S&P index, which was essentially unchanged.
This is, of course, an extreme case... to show the volatility, risk and potential returns for traders. While stocks deliver huge returns, you can't profit from them unless you happen to buy and sell at the right time. Remember, stocks don't always grow! One of the reasons it is so hard to find the right time to buy and sell stocks is that there is no telling how the markets will react to changes in the capital markets.
But if you're investing for the long term and are confident in your purchases, there's nothing to worry about.
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.