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.

Previous post:

Next post: