A large number of investors try to minimize losses and maximize gains by timing the market. They try to buy stocks when prices are low but rising and sell when prices are high but falling. However, getting this timing right is not always easy. Moreover, every time one makes a trade, they have to brokerage fees and taxes. These costs can add up and reduce any additional returns one has gained on both the purchase and sale of stocks. Hence, Kavan Choksi mentions that rather than trying to time the market, investors should consider spending time in the market instead. A passive investment strategy, such as buy-and-hold, can help investors enjoy long-term returns.
Kavan Choksi discusses a few reasons that makes holding stocks for the long-term a good idea
The buy-and-hold strategy is a popular long-term investment approach. As per this strategy, one purchases stocks and other securities and holds on to them regardless of changes in the stock market. There are many factors that make holding stocks for the long-term a good idea. Here are a few of them:
- Investments can grow despite market fluctuations: The United States stock market volatility can be fairly intimidating. Even though the performance of the market is not a guarantee of future returns, history does show that the market can recover from declines and still provide investors with a positive return on long-term investments. The market has in fact posted a positive annual return in almost eight out of every 10 years over the past three decades or so.
- Ride out highs and lows: It is not uncommon for stocks to drop 10% to 20% or more in value over a shorter span of time. Investors can have the chance to ride out some of these highs and lows over a span of several years or even decades to generate an improved long-term return. A buy-and-hold strategy can help investors to avoid missing out on the biggest days of the market. The hardest aspect of choosing when to be in or out of the market is that missing a few important days or weeks of a five- or ten-year cycle may have a considerable impact on the returns. Historically speaking, a large share of the gains and losses in the stock market tends to occur in just a few days of any given year. As the pattern of returns is not predictable, having a consistent long-term investment can add to the bottom line of the investors.
- Grow with compound interest: A buy-and-hold strategy can help investors to take optimal advantage of compound interest. Any interest or dividends that the stock portfolio accumulates tend to compound over time, thereby increasing profits in the long run. Compound interest can especially be advantageous for people who start long-term investing early.
As per Kavan Choksi, one of the key benefits of a long-term investment approach is cost savings. Keeping the stocks in the portfolio longer is often more cost effective than regular buying and selling. After all, the longer an investor does hold their investments, the fewer fees they have to pay.