Saturday, March 23, 2013

More on Long Term Stock Investing's Benefits

I'm an advocate of owning shares of good companies for the long haul. Some think of this approach as simple minded, but I prefer to think of it as just using simple common sense.

It costs little, takes little time, its tax benefits (for taxable non 401(k)s) are huge and the compounding effects of dividend growth and share appreciation make it a winner in every way. Besides, its results are superior, and that's the most important reason of all to become a self educated, self reliant individual investor.

It's a winner for the individual, that is, but not so for the commissioned stock broker or fee based 'expert' financial advisor. But that's just another difference between the MOM and the OPM approaches to personal financial management.

Here Comes the Slow Stock Movement captures the essence of the individually directed long term approach to investing very well. It says this in pertinent part:

"The renowned investor Benjamin Graham often pointed out that small investors have great advantages over professionals: Individuals can choose not to measure their results over the short term, and they can invest at will in unfashionable stocks.

So you don't have to have ants in your pants just because everyone else does.

Research by University of California economists Terrance Odean and Brad Barber has shown that investors who traded the least outperformed those who traded the most by a remarkable 6.8 percentage points annually.

So buy an index fund and hold it forever. Or find a mutual fund with expenses under 1% and a turnover rate of 33% or less, meaning it holds its typical stock for at least three years. Or pick a few stocks yourself, buying on bad news and then holding stubbornly through all the short-term noise.

Before you buy, write down at least three reasons why you believe the company is a good investment; sell only if those reasons have become invalid.

"If you are fortunate enough to invest in one of those rare companies that are great long-term investments," Mr. Winters says, "the best reward is just owning the shares for years on end.""

Summing Up

And one more thing. Establish the habit of saving and investing as early as possible in your working career.

Having some 'skin in the game' early will help immensely with achieving personal financial literacy and growing knowledge over time. The rule of 72 works with respect to knowledge, too.

Then acquire the habit of periodic dollar cost averaging saving and investing.

After that, it's ok and even better to be a passive and even lazy investor.

Nevertheless, you should actively monitor the actual performance of the companies you own and not focus on the short term fluctuations in the price of those companies' shares.

But if you're uncomfortable buying shares in individual companies, just invest in a low cost S&P 500 Index fund instead. It may be boring, but it works, too.

The key is to start early, save and invest regularly and then stay put for the long haul.

That's my take.

Thanks. Bob.

1 comment:

  1. Even a lazy investor should check up on the investments from time to time to make sure they are doing what is wanted. I know I do, though I'm not as deeply invested as maybe I should be. But I am also looking into the variety of options I have at because I want to diversify a bit. Keep up with what you have and hopefully it will grow.