Investing for the long term can be boring. After all, where is the excitement of “buying and holding” stocks? In a world of Tweets, text messaging and news feeds, people want action and activity.
The simple fact is that most investors make one common mistake. And this single mistake could end up costing you extra fees and reducing your overall returns.
Do you make the mistake of having a very active investment account? Are you making lots of trades, trying to time the market, or making frequent changes to your portfolio? If the answer is yes, I encourage you to pay close attention.
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This type of activity leads to one big risk: missing out on a big move for the market or an individual stock. The most important reason you should invest for the long term is to capture “big pop” days. Most of your gains will be concentrated in just a few trading days. Being on the sidelines during these days dramatically damages returns.
The table below covers the S&P 500 index from Jan. 1, 1994 through Dec. 31, 2014. The cost an investor pays for being sidelined even for a few days is indeed steep.
The Cost of Failing to Show Up
|$10,000 Invested in the S&P 500 Index||S&P 500 Annualized Return||Terminal Value of the $10,000||Gain/Loss||Impact of Missing Days|
|All 5,037 Trading Days||9.22%||$58,352||$48,352||None|
|Less the 5 Biggest-Gain Days||7.00%||$38,710||$28,710||-40.62%|
|Less the 10 Biggest-Gain Days||5.49%||$29,121||$19,121||-60.45%|
|Less the 20 Biggest-Gain Days||3.02%||$18,146||$8,146||-80.15%|
|Less the 40 Biggest-Gain Days||-1.02%||$8,149||-$1,851||-103.83%|
Source: Index Fund Advisors
What holds for the S&P 500 holds for individual stocks. Investing for the long term means capturing dividend income and high returns.
Tobacco and cigarette giant Altria Group (NYSE: MO) is a poster child for long-term investing. The company has returned over 100% since it was first recommended to High Yield Wealth readers in September 2011. Over that time, the quarterly dividend has increased to 27%.
Over the same period, Altria’s share price has jumped from $27 to $50. Most of the appreciation was concentrated in a few days. Had I attempted to actively trade Altria shares, I would have surely missed the “big pops.”
What’s more, the return would have been further compromised by missing Altria’s dividend. Investors who have hung with Altria for the past four years have realized a 19% average annual total return.
Yes, I could have recommended trading out of Altria and trading into something potentially more profitable, but chances are unlikely that would have happened. More likely, I would have traded into a stock that would have underperformed Altria. After all, a 19% annual return is very good.
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This buy-and-hold strategy works best with best-of-breed companies. Altria is certainly one of them. These companies sport strong brands that dominate their market niche. What’s more, the economic moats they have developed ensure they will continue to dominate into the distant future. Altria dominates its niche, and that won’t change.
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What’s more, all but one is a dividend grower. So while you’re waiting for the big pop, you’re also collecting a rising stream of income. The longer you hold, the more income you collect each year. This is truly a wealth-producing strategy for the ages.
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