What should be your time horizon while investing in stocks?

by Manshu on November 6, 2009

in Opinion

This question popped up in a comment last week, and since I hadn’t thought of it for a long time – I had never written about it. I thought it’d be a good idea to address this question with a quick post.

Before you start reading the post, I should warn you that this is just the opinion of your humble blogger and nothing more than that.

Okay, now on to the question itself.

What should be your time horizon while investing in stocks?

The short answer is:

Very Long

Now, the long answer:

Here are my top three reasons why you should hold stocks for very long.

Companies take time to grow

A stock is an ownership in a company, and for a stock to really take off, — the underlying company needs to grow. Companies don’t quadruple their revenues overnight. They need many years of doing the right thing to achieve some sort of size and stability. If you keep buying stocks thinking of them as little lottery tickets, — you will repent sooner or later. You need to buy companies that you think will gain market share, make great products and keep customers happy for the next ten or twenty years. Only then will their stock grow, and you make money off your investments.

Ability to endure crashes

The longer your time horizon, the greater is your ability to wait out crashes and sell when the market is doing well. If your time horizon is short, then you will have to sell even if the market is not doing too well, and that can be really bad.

Last October, when the market had tanked, I had written a piece about catching falling knives, in which I wrote that the market had gone up and down several times in the last few decades, but in the long run, it slopes upwards. At that time the situation looked really bleak, but one year down the road – we are already seeing signs of recovery.

If you had a short horizon, and didn’t believe stocks were a long term investment, you’d most likely book your losses and exit out of the market. But that would have meant selling off when the market was quite close to the bottom.

An investor with a long term horizon could wait out the crash, and say – I can wait for a few years for this market to recover. You could stop investing any more money if you don’t feel comfortable, but you’d be saved from selling at the bottom of the market.

Short term mentality leads to trading and incurring losses

If you are not a professional trader, — trading in stocks will rarely ever make you money. It will make plenty of money for your stock brokers, but not so much for you. I know this from personal experience and knowing hundreds of people in all age groups, professions, education levels and income level who share the same experience. Unfortunately, this is not something that I or anyone else can explain, you have to experience it yourself to learn the lesson. But I am very confident that your lesson will be the same as mine.

These were my top three reasons to prefer long term investing over anything else. Feel free to add your reasons of why a long horizon works for you, and I’d really enjoy listening to some arguments why I am wrong, and short horizons are the way to go.

{ 5 comments… read them below or add one }

Aswin November 6, 2009 at 5:35 am

That was a good food for thought. I am new to stock trading and a small investor. The 3 points that were mentioned here were straight to the point and clarified my apprehensions about trading.

Stocks are not like lottery. Treat them as you would treat a fixed deposit (FD) in a bank and forget it for 5 years. Invest in a good well performing, able and growing company and definitiely you will see more money than any other investments. Do less trading and reap long term benifits.

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Aswin November 6, 2009 at 5:40 am

I also feel short term trading can be done safely when a company’s stock is in a all-time low and definitely we see that it is bound to increase no matter what. (say, recent case of Satyam). Lot of people buy at that time, and in a matter of few weeks, the stocks grow 100% or more and reach a level period. Sell it off that time- what say? Require your comments on this.

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Manshu November 6, 2009 at 7:32 pm

I honestly do not believe that “trading” and “safety” are two concepts that go hand in hand. There is always risk because no one knows where the bottom is. What might look cheap today may become expensive tomorrow (when the market falls even more).

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Patrick November 8, 2009 at 8:28 pm

And the caveat to this post is:
… or until something happens that dictates it is time to sell. Meaning companies change for both good and bad, so there is always a chance that the reason you bought the stock no longer exists.

But in general, holding stocks for a longer period of time can be a good investment strategy – especially for dividend paying stocks. 🙂

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Patrick J November 19, 2009 at 9:03 pm

Which is why I have switched over to only buying EFT’s instead of buying individual stocks. You get more coverage without worrying about taking a huge loss if the company you choose has a bad spell. The downside of EFT’s is that you will also miss out on a huge hit of buying a stock low and having the company really take off.

I think it would be great if you could do a review of how a portfolio consisting of 30% international (Europe), 30% large cap, 10 % emerging markets, 10% bonds, 10 % small cap, 10% China.

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