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For most people, it is easy to predict what their plans will be within the next hour. Some people can plan things a week or month out, but past that most people won't know for certain. The future is very flexible and mostly unknown until you find yourself there.
The world of investing works a little differently. As an investor you have no idea how your stocks will fair during the next 6 months or even the next couple years. This is why it isn't usually advised to invest money you expect to need within the next 5 years into the market. What if you wanted to take all your money out during the 2008 event or the massive drop that took place in March 2020? The short term is very murky in terms of how things will end up.
The long time horizons give you a much more predictable return. It is important to understand that during short periods of time you are having to deal with stock volatility.
During a one year time period, you might see a gain of 50% or a loss of 40% to give some rough numbers. As that investment range increases these risky investments even out a bit and the return can look very good.
My M1 Finance returns since 2015 to now.
The image above shows how well my portfolio holdings have performed since 2015. You can notice the dips and notice how it raises. Ultimately, it keeps moving up into good returns.
You will notice that my chart for a year worth of months (second image) looks very different. Things were alright then took a major dive in March. Things still haven't quite recovered to normal and many people had portfolios suffer with dividend cuts.
None of my holdings in this account suffered a dividend cut so things were pretty fortunate for me. I did not sell any holdings and continued to invest even during the dip.
The 25 year investment period most young investors have to work with has the potential to have return gains of 18% per year and a worst-case number of 6% a year. For more in-depth information refer to this post.
The important concept to pick up here is this thing known as time diversification. It basically implies that smart investors should hold their investments for very long time periods if possible. The return numbers indicate that such people will be rewarded.
Active Trader Observations
Many investors don't have a long-term way of seeing things. This usually ends up costing them. Most people who trade stocks or holdings frequently tend to do really badly. They usually underperform the buy and hold strategy where people invest in some index funds and ignore things.
As mentioned earlier, trading costs can add up—fast. With every trade, you have to cover the ETF bid-ask spread as well as the commission, unless you enjoy commission-free trades.
More importantly, don’t forget about capital gains. In addition to the capital gains an ETF can generate by itself, the more you trade, the more you may be subject to higher short-term capital gains tax rates. Buying and holding investments aligned to an appropriate asset allocation may help you enjoy long-term performance without paying extra taxes.
Sourced from Vanguard's blog which I highly recommend keeping tabs on.
I really like studying what Vanguard has to say about this. They found that top-performing investors usually do very little tinkering with their investment portfolios. There is a tendency for them to buy some low-cost funds usually set to auto-invest some amount. The best investors forgot about their account altogether while their investment grew.
Ignoring the Noise
There have been some massive changes to how investors go about trading. In the 1950's stocks were held for an average of 6 years before they were traded while current day trading activity shows people might only hold a stock for 6 months.
The general theory is that people in this current day are bombarded with constant information that influences their course of action. Some of this information is good and useful, some of it is harmful. People will listen to "experts" or people offering up stock picks or stock advice in general. There is a ton of evidence that warns against frequent trading, yet people seem to be doing it anyway.
Try to Do Less
In today's world, things move really fast. We are constantly pressured to work harder and faster or produce results quickly. In some arenas, this works pretty well although you might be tired.
Investing doesn't work this way. In most cases, the best thing you can do is pick your stocks or diversified index funds and ignore it entirely except maybe twice a year. Developing a true long-term mindset is the ticket to success.
© 2020 Raven Rae