Last week I wrote about why I prefer long term investing to short term investing or trading. This week I take a look at five things that can help develop such a mindset.
- Realize that you are long term on a lot of stocks anyway: One of my finance professors used to kid that any stock that loses money becomes a long term investment. Most people donâ€™t like to book losses, and if they hold a certain stock or mutual fund which goes below their purchase price, they donâ€™t end up selling it at all. There are certain dividend paying stocks that bring such a steady stream of income that you donâ€™t feel like selling them at all. Then there are mutual funds that have a lock in period because of tax reasons. If you think of it this way, there are several stocks and mutual funds that you own or are forced to own for a long term anyway. Recognizing that helps get over the mentality of â€“ â€œWho knows what will happen in 3 years, I need my returns quickâ€. By acknowledging that you hold a lot of stocks for a number of years, you make it easier to shift to a mindset where you can think long term.
- Invest money that you wouldnâ€™t need for a number of years: If you have invested the money that you wonâ€™t need for a number of years â€“ you will be able to avoid forced selling. Forced selling is when you donâ€™t really want to sell a stock, but are forced to do it because you need the cash. If you invest only surplus cash in stocks, — you can avoid this, and be in the market for as long as you want.
- Invest in solid companies: If a large part of your portfolio is in fundamentally sound stocks, the kind that has been around for a number of years, have a lot of cash on their books, low debt, and make products that customers like â€“ there is a good chance that they will come out of a crash better than others. This means that you will feel less panicky during downturns and wonâ€™t end up selling at the bottom.
- Plan inaction: A large part of being a long term investor is planned inaction. A lot of people seek excitement from the stock market. That can become a problem if you try to do too much — trade in and out frequently, try to average when there is no need to, and incur a lot of trading costs, without any corresponding gains. A good way to plan inaction is to stay away from checking your stock portfolio every day. Moving stock prices are a powerful motivator for buying or selling. Looking at them frequently urges you to take action which you otherwise wouldnâ€™t. Instead of looking at your portfolio frequently, set price alerts for stocks. This way, you donâ€™t become obsessed with prices, and at the same time donâ€™t lose sight of your stocks also.
- Set Google Alerts for the companies you own: Setting Google Alerts for companies you own helps you keep track of news and events about them. It also does another more subtle thing. It tells you that not a lot happens with your companies on a day to day basis. When I started setting Google Alerts for stocks that I owned, — I found that my stocks were not news worthy. Not a lot used to happen to them which got reported in the media. Initially that made me frustrated, but then I accepted the fact that there isnâ€™t a lot that happens to a company that is newsworthy. Thatâ€™s just the way it is. Eventually it dawned on me that if I donâ€™t expect the company to do great things every day, — how can I expect the stock to do great things daily? This is a good exercise and I recommend that you do it too.