The Case for Being a Passive, Buy and Hold Investor

In my opinion, the best way to have exposure to the stock market is to buy great companies and hold them through any market condition. Generally, trading in and out of positions or re-adjusting your portfolio based on macro factors does a lot more harm than good. Usually macro conditions have no merit for forecasting stock prices and moving positions in the portfolio does not enhance returns. Trading, re-positioning or taking profits are quick ways to rack up excessive fees and commissions. To quote Warren Buffett, “Wall Street makes money on activity. You make money on inactivity.” Being a passive, long term investor has many advantages over trading.

1) Its low maintenance – Passive, long term investing doesn’t require a lot of your time in front of the stock market. Unlike a trader, during market hours, a buy and hold investor is free to spend time with their kids, walk the dog or start that workout program you’ve been putting off. The practice of watching daily price movements is highly counterproductive to the temperament a long term investor must maintain. Some traders may claim that passive investors simply ‘don’t do anything.’ As Wall Street makes more money off of trading fees, commissions and activity, the ‘don’t do anything’ strategy, in my opinion, is a thoughtful and rational approach to investing in stocks. Why would you want to give Wall Street more of your money in trading fees? The low maintenance way is to think like an owner and only buy stocks that you would be comfortable owning the entire business of. When you buy stocks with the conviction of being the owner, short term price fluctuations are irrelevant. As an owner of a business, do you sell out at the first sign of fluctuation in business? No, and you shouldn’t either with stocks.

2) It’s easier on the nerves – I say ‘easier’ because even passive investing has its nervous moments, but nothing compared to the everyday ups and downs of trading. An advantage of buy and hold investing is admitting defeat to the rationality of stock price fluctuations. The stock market moves in an irrational and chaotic manner in the short term. Making sense of short term moves can be profitable for some, yet the vast majority of short term traders underperform a passive investor. The odds of winning in trading are similar to the odds at a casino. The prudent behaviour is to maintain a steady temperament and essentially ignore stock market fluctuations, unless values depress so much that you can buy stocks on a bargain. As a buy and hold investor, time is on your side, so if your stock goes down from where you bought it, you don’t have to worry like a trader if you still think the company is great.

3) Less fees and commissions – Fees are often overlooked by most do it yourself investors. When working with small amounts of money, fees and commissions become even more important. Learning to control your impulse trading and doing far less when it comes to portfolio management may be the most profitable move an at home investor can make. Despite what you may hear, the big money in investing is made by diligent, long term investors, not from traders. As mentioned earlier, I compare trading to the casino; sure you can make money, and some people learn how to game the system better, but over the long term, you underperform. The reason why casinos are in business is because more people lose then win. The same can be said about Wall Street, more people trade too much and lose, especially the beginner investor.

4) Its proven – Very simply, common knowledge passed down from past great practical financial minds such as Benjamin Franklin, say that the way to wealth is through slow, steady and diligent industry and frugality. It makes sense that something as difficult as gaining financial freedom cannot be accomplished quickly, otherwise everyone would be rich. Benjamin Franklin also spoke of the lure and danger of ‘get rich quick’ schemes. Franklin warns that even men of good conscience are enticed by the prospect of quick and easy money, when in reality the real way to wealth takes a great deal of conviction and time. My advice is to avoid the herd of quick money traders and the Wall Street mentality, and embrace the old school American, Benjamin Franklin mentality.

The stock markets record over the long term is quite compelling as well. Despite recent negativity, stocks have returned about 9% annualized return over the last 100 years. With current sentiment, you would think the return would have been negative 9% over the long term. The fact is, if you bought the Dow Jones 50 years ago, fell asleep and woke up today, you would be extremely happy with your investments. These are the facts that you must keep in mind when executing your long term investment plan.

John Laframboise is founder and author at http://www.riseofamillionaire.com, a personal finance Blog that follows his progress to become a millionaire. John has held positions within the Canadian banking industry and has a Bachelor of Commerce from the University of Windsor in Canada.

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