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Investing 101: The Psychology Of Long Term Investing

 

Officially, a long-term investment is one that you will hold for more than one year. But a genuine long-term investment is usually held for much longer. The more conservative estimates of long-term often range between 3 and 5 years, and sometimes as far as 10 or 20 years. So for anyone hardwired to look for instant results (which is ALL of us), long-term investing presents some unique challenges.

 

Sex Appeal Status of Long Term Investing: None

The most important thing to remember about long-term investments is that they are not sexy. Long term investing (usually combined with value investing) is by definition boring and dull. It is more about waiting for your investment thesis to be proven than about chasing returns.

What makes this even more difficult is that even if your long-term investment strategy is a good strategy, there will be long periods of time where you look like a fool, and the people who are buying the high-flying stocks will make sure that you know you look like a fool!

 

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This kind of pressure is inevitable with any type of investment, but it is more pronounced for long-term investors.

“Missing the party” can be very disappointing, especially when it’s a party everyone is talking about.

So how can you possibly feel good about your long-term investments when there is so much psychological pressure to get the fastest results?

Here are a few things you can try:

Don’t look

Studies have shown that bad news knocks us down twice as much as good news lifts us up (for further reading, this study might interest you: Stock Market Overreaction to Bad News in Good Times).

For example, if you look at your investment portfolio one day and you see that it is up for the day, it make you feel good (+1), but if you see that it is down for the day, it will make you feel twice as bad (-2). So let’s assume you look at your portfolio every day for two weeks, and it goes up for half of the days but down for the other half, and the portfolio is up at the end of two weeks.

When you add this up, you end up feeling worse overall:

5 days up times (1) = (5)
5 days down times (-2) = (-10)
Total = (-5)

Even if your portfolio is up at the end of the two weeks, looking at it every day will still make you feel worse (-5 total). However, if you only look at it once, then you will see your performance over the entire two weeks, and you will feel good (+1 total).

This example shows a very short time period, but extended to longer periods of time, the theory still holds. On average, your investments will go up on half of the days and down on the other half, and the more often you check your performance the worse it will make you feel.

So if you want to be a long-term investor and you want to feel good about your performance, the first thing you can try is to look at your stock price performance as few times as possible. You should still follow the news surrounding your investments, but try to avoid looking at the price.,

 

Don’t listen

If you are taking a long-term investment, and someone else is investing with a shorter time period, then it doesn’t matter what they are doing or what they are saying about you.

Their investments might be good for the time period that they are using, but that does not mean they will do better over the long run.

This is probably the most difficult part about making long-term investments, because when you see someone else performing better than you, there is a very large temptation to abandon your boring investments and chase after the sexy stocks. So when you have this temptation, it is useful to remember the advice of the “Father of Investing,” Benjamin Graham:

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Now, this isn’t to say that you shouldn’t consult the opinions of friends, family, and peers. This is actually an important aspect of investing.

However, if you see the crowd moving in one direction, evaluate with care why they’re flocking in such a way. Their movement may go against your investment strategy. This leads me to my next point:

 

Make new friends

If you are looking into making long-term investments, then the best thing you can do is find other people using the same investment time frame. Fortunately, SprinkleBit makes it very easy to search for and connect with similar investors (and it’s free). And when you find other investors who understand your investing challenges, you can use this social aspect of investing to your advantage. By discussing your investments with people who are using the same time frame, you can find comfort in the fact that you might all look foolish at the same time.

You should still keep an open mind, because this isn’t about ignoring justified criticisms to your investing approach.

It’s about knowing the difference between what works for your time period and what works for another time period.

Expanding your circle of friends can only help you.

 

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Play anyway

Even with all the advice listed above, sometimes you still want to play the short-term game. And even if you choose to be a long-term investor, there is nothing wrong with feeling the need to make a few short-term trades. You can do this, but you shouldn’t make it a large part of your portfolio. In most cases, long-term investors will set aside 1% to 3% of their portfolio to be used as “play money.” This way, they will still have their core long-term portfolio, but can also have a little fun on the side. However, if you choose to do this, you will want to make sure that you keep your “play money” separated from the rest of your portfolio so you don’t mix up which investments are long-term and which ones are short-term.

 

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Overall, this is not a guide on how to make long-term investments. That is an entirely different topic.

These are just a few simple things you can do that will make it easier for you to hold a long-term investment. Because when they say “the waiting is the hardest part,” that’s true for investing too.

Note: the information contained in or provided from or through this post is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice.

 Continue the discussion! 



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At SprinkleBit, founded in 2011, we believe that if you have a dollar, then you have what it takes to be an investor. Sometimes you just need a little extra help to build your confidence. With our virtual simulator and our 24 free SprinkleBit University chapters, you will be able to learn the ins and outs of the market risk-free. Once you're ready to dive into the real thing, the community will be right there with you to help you on your journey. Dive in and start taking control of your financial future. You won't regret it.

4 Comments

Long Term Investments Not Sexy, But Good Strategy | The @SprinkleBit Investing Blog

[…] little bit of Friday Humor to round off your week. We agree that long-term investments aren’t the sexiest kind of trading strategy out there, but we also can’t ignore the […]

jake

Very wise piece here Andrew. Good job. The problem of wanting instant gratification is prevalent in all aspects of the modern day American society. Not only in terms of investing, but also in relationships, careers, even our personal health and fitness. We want Perfect Now! But in reality, rarely does Perfect happen Now. Usually Perfect unfolds slowly more like melting ice cream, slowly. For example we may be married to a person for many years and then just one day, in one instant, out of nowhere, we understand in a very enlightened way, how much we love that person. Well, in terms of long term investing a similar feeling arises. Example; you buy a stock/company or rental property and slowly take care of it. You watch it periodically, fix the roof once in awhile, or in the case of a stock, look at its quarterly earnings, just to make sure nothing is amiss. Then, leave it alone. Let life happen. After 20 years, you realize “wow, I was a freakin’ wiz kid” when the investment with rents/dividends double in worth”. No, you weren’t a genius, you just got lucky buying the right asset at the right time and YOU SAT ON IT. You didn’t sell and you didn’t panic. You bought quality and relaxed when others couldn’t keep their head. Thats all there is to proper investing. Simple. Buy quality, monitor quarterly, go play with the kids, watch tv, make love, and wake up 20 years later and reap the rewards. Trading on small time frames is just gambling and nonsense behavior.

Kathryn Wells

Jake, thanks for sharing your personal investment philosophy. I rarely find comments to be so poetic (and sound!) in the investing arena! My dad has always been a huge proponent of long-term investing. He’s a CFA, and always, always told me and my sisters to invest in something you believe in, and then forget about it until you retire. I believe that that is the way to go in general, but I learn by doing, so it’s been great practicing making market or limit orders and to see that the world doesn’t end when you make a trade (I sometimes live in hyperboles when it comes to risk!), and to see that I can make good decisions about investing. So far, my experience in the virtual market has given me the confidence to make some good decisions with my real portfolio.

I’m wondering about your experience with stocks that performed very badly, and seemed to never be on the road to recovery. Have you ever simply gotten out of an investment because it was tanking a bunch? Sure, no one can predict when a stock will go back on the upswing so there is a gamble whether you stay in or get out and cut your losses, but have you ever reached a point with a stock when you said “enough is enough, I’ve reached my risk limit” and then sold it for good? or sold it and then bought it back when you saw it go back on the upswing? These are the questions I think many investors have all the time, despite advice to the contrary!

jake

Hi Kathryn
I think you are asking me if I ever use a stop-loss on my investments. When I used to trade stocks in short time frames (days or weeks), then yes, I always used stops. Usually my stops were about 10% below my entry price. If the stock went up I would follow the price upwards with a trailing stock, usually again, about 10% below its current price. But, I don’t trade stocks in the short term time frame anymore. In fact, I no longer buy individual securities for a variety of reasons. One, I found the individual company risk is just too much for me to handle. The frustration of media events, earning reports, scandals, law suits, politics, opinions, analysts ratings, Cramer talk, gurus, news, overseas events, etc…all made my holding more volatile than I wanted. So, now I just stick to buying and holding for the very long term (read, never intend to sell). I hold passive index funds that are highly diversified, very liquid, low cost, low turnover, and have yields. I never buy an investment that does not provide a yield (dividend or interest payments). I consider relying upon capital appreciation to be speculation. Therefore I do not hold gold or other commodities if they don’t pay a yield.

Assessing your personal risk level is perhaps the most important aspect of investing. Match your asset allocation to your personal risk tolerance. If you intend to trade in short time frames, you will inevitably experience “whipsaws”. This happens when you buy a security take a loss on it, then, the stock goes back up after you sold it. If you are going to trade short time periods, best to just get used to it. I hate the feeling of whipsaws and that is one of my reasons I don’t trade in short time frames. I hold for the long term (20 or more years). I also don’t ride roller coasters, drive fast motorcycles, or go to Las Vegas.

I think it is good practice for young people to experience investing pain early on in their life. Pain is a form of awakening. Hopefully, losing money will teach the investor lessons for improvement. On my own investment journey, I have suffered more pain than I wish to realize but luckily I feel I have come out on the other side of the tunnel confident that I can handle any financial set-back that comes my way.

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