If you have put anytime into reading about or trading the market, I am sure you would have heard the expression “Buy and Hold”. It is one of the most simple trading strategies, but has given some of the greatest returns.
If we narrow this down, using this strategy on index funds rather than stock picking can prove to be a great way to earn some interest on your money. Here’s why.
You Cannot Time the Market
Timing the market is one of the toughest things to do. In fact, the greatest investor of our generation, Warren Buffett, had this to say, “We haven’t the faintest idea what the stock market is going to do when it opens on Monday — we never have.” He has always lived by the phrase, “Time in the market beats timing the market.” Below is an excellent example of how true this can be.
Red Line – represents the growth of $1 invested from 1980 – 2019 if you bought US stocks at the official end date of a recession and sold at the official start date of the next recession.
Black Line – represents the growth of $1 if you simply bought and left the investment alone across the same time period.
As you can see, the black line (Buy and Hold) returned nearly 2.5x more than trying to time the market.
So, you can clearly see the benefit of sitting through those tougher market conditions. Even someone with the experience of Buffett does the same. This is so much more important for someone who is using the market as a secondary way to build wealth.
Trying to “time the market” is a seriously dangerous way to harm your returns if you are in for the long haul. After all, if you buy today or next month, how much difference will that play when you come back to your investment in 10 or 20 years?
Index Beats Stock Picking
Once again, if the market is a passive way for you to increase your savings and wealth (rather than it being your main focus), index funds will pay greater than individual stock picking.
Diversify across several economies and sectors. The US offers the S&P500 and Nasdaq. The UK offers FTSE100. You could also move into sector focused indexes such as the Russell 3000 Growth Index.
Individual stock picking should be a minority in your portfolio.
Wealth is not made overnight. If we go back to the great example of Mr Buffett, his wealth grow by compounding the gains he made.
- 21 years old – $20k
- 30 years old – $1M
- 37 years old – $10M
- 47 years old – $67M
- 56 years old – $1.4B
- 66 years old – $17B
- 91 years old – $91B
Be patient with the market. Slowly contribute to it with money you can put aside each month. But most importantly, “buy and hold” on smart investments.