How long to hold and when to sell?

No one always knows where the stock market will go in the short run. But in the long run, the longer you remain invested, the more money you’ll make. And if you’re still building a portfolio of stocks, then the market setback is a gift rather then a disaster.

Give me a lever long enough (i.e. time) and a place to stand (a firm and realistic investment policy), and I can move the earth. (With thanks to Archimedes.)

The S&P/TSX Composite Index did very poorly last year. Will stocks continue to decline as a bear (falling) market becomes entrenched? Or are stocks poised to recover lost ground?

We, like everyone else, have no idea where the market will go from one day to the next. What’s known as ‘market timing’—buying and selling at the right time—is very difficult to do successfully and on a consistent basis. As successful investor Bernard Baruch once quipped: “Buying at the bottom and selling at the top can’t be done—except for liars.”

While market timing seldom works for long, an investor’s time in the market is critical to his or her success. Charles Ellis is the author of Winning the Loser’s Game: Timeless Strategies for Successful Investing. Mr. Ellis writes: “Time is Archimedes’ lever in investing.”

Time is Archimedes’ lever in investing

“Archimedes is often quoted as saying: ‘Give me a lever long enough and a place to stand, and I can move the earth’. In investing, that lever is time (and the place to stand, of course, is on a firm and realistic investment policy).

“Time—the length of time investments will be held, the period of time over which investment results will be measured and judged—is the single most powerful factor in any investment program.

“If the time period for investing is abundantly long, a wise investor can commit without any great anxiety to investments that appear to be very risky in the short run.”

If you plan to hold your stocks for years to come, then you need not worry unduly about transitory stock market movements. After all, as the economy grows over the years, well-priced and well-managed companies earn more, pay higher dividends and see their share prices go up. Reinvest the dividends and your money compounds. Albert Einstein called compound interest “the eighth wonder of the world”.

In fact, if you’re still building a stock portfolio, then the market setback is a gift. That’s because contributions to your self-directed RRSP (Registered Retirement Savings Plan), TFSA (Tax-Free Savings Accounts) or a standard brokerage account will go further. You’ll be able to buy more high-quality stocks with less worry of paying too much for them.

The stock market setback will hurt jumpy short-term investors and those winding down their portfolios. We always advise retirees to cover their living costs for at least the next five years. Do this and you will have more flexibility about when to sell your stocks, and how many.

This is an edited version of an article that was originally published for subscribers in the January 18, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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