You Need to ALWAYS Stay Invested in Stocks

Filed in Money by on February 13, 2014 0 Comments

iStock_000026870703SmallIt is the single biggest trap that investors, both novice and professional, fall into. They get anxious about the stock market and they pull all or some of their money out for a period of time. Don’t feel at all bad if you’ve ever done this, because you have excellent company. Some of the world’s greatest investors have made this mistake.

I want to take a moment to qualify my remarks a bit. When I say that you should always stay invested in stocks, I am referring specifically to savings that are being invested for a long time period, by which I mean 10 – 15 years or longer. An excellent example is retirement savings. You will have these funds invested not only until the time you retire, but also presumably until you die, since you will be using these investments during your retirement phase of life. Therefore, these are almost always long-term investments. Children’s college education savings are initially long-term, but eventually become shorter term as the children’s college years near. For short- to medium-term investments, it is not always wise or necessary to have exposure to stocks, due to their inherent volatility.

One additional clarification. When I say “invested in stocks,” I mean individual company stocks, stock mutual funds, stock-based “ETF’s” (Exchange Traded Funds), and/or stock-based index funds. My recommended form of stock investing is in index funds.

So for long-term savings, you should always have a portion remain invested in the stock market in one form or another. The first reason for this is that stocks earn a greater return than any other type of investment, and you need that higher return to accumulate wealth and stay ahead of inflation. Inflation is a major concern in long-term investing because as the prices of goods and services increase over the years, if your investments do not keep pace, the purchasing power of your savings will diminish. This can have a huge negative impact on your lifestyle later in life.

The second reason is that it is a fool’s errand to try to “time” the stock market so that you are in the market when it is going up and out when it is falling. A recent study revealed that while the average stock mutual fund earned 9.9% per year from 1991 – 2010, the average stock mutual fund investor earned only 3.8% per year over that time frame, due to investors’ predilection for jumping in and out of stock mutual funds at the wrong times. So these investors lost 6.1% per year as a result of their efforts to beat the market! Also, studies have shown that the majority of the stock market’s gains in any given year occur on 20 – 30 trading days during the year. Do you really think you can pick those particular days each and every year?

As I am fond of saying: Good luck with that. Let me know how it’s working out for you. (Usually not so well.)

The moral of the story is this: for long-term savings, choose an exposure to stocks in your portfolio that you can live with during both good times and bad in the stock market, whether that is 30%, 50%, or whatever, and just leave it there. Let time and the essential nature of stock investments do what they do best, which is provide long-term investment returns that can’t be beaten.

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About the Author ()

TIM MCINTYRE retired in 2004 from his position as president of Applied Systems after facilitating a successful sale of the company. At only forty-six years old, he made the unusual decision to fully retire to pursue other interests and simply enjoy free time. As a hard-driving Type A personality, this turned out to be a significant challenge for the Notre Dame and University of Chicago-educated MBA, CPA, and Certified Cash Manager.

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