Long-term investors seek growth in the value of their investments that exceeds the rate of inflation. In other words, they want their investments to provide a positive real rate of return. This is the return after subtracting the effects of both inflation and income taxes. A long-term investor generally wants to hold an investment as long as it provides a return commensurate with its risk, often for 10 or 15 years or more. In addition to understanding the overall economic picture , longterm investors understand how the securities markets (places where stocks and bonds.
are traded) are performing as a whole. That is, are the markets moving up, moving down, or remaining stagnant? A securities market in which prices have declined in value by 20 percent or more from previous highs, often over the course of several weeks or months, is called a bear market. Since 1926, several bear markets have occurred, with the most recent bear market lasting from 2000 to 2002. In contrast, a bull market results when securities prices have risen 20 percent or more over time. Historically, themore than 20 bull markets have seen an average gain of 110 percent. The bull market of the 1990s saw stock prices increase more than 300 percent!
A bull in the market is a person who expects securities prices to go up; a bear expects the general market to decline. The origin of these terms is unknown, but some suggest that they refer to the ways that the animals attack: Bears thrust their claws downward, and bulls move their horns upward. Bear markets last, on average, about 9 months; bull markets average 29 months in length.
Long-Term Investors Understand Market Timing
Long-term investors must be able to withstand some market volatility, the likelihood of large price swings in their chosen securities. Although they do not like to be described as such, some long-term investors are market timers. Market timing entails shifting your money into cash or bonds when you think stocks and stock mutual funds are overpriced and then later reinvesting your money in stocks and stock mutual funds when you think they have gotten cheap. Market timers pull out of stocks or bonds in anticipation of a market decline or hold back from investing until the market “settles down.” In this scenario, investors try to “time” their investments, hoping to capture most of the upside of rising stock prices while avoiding most of the downside.
A bull in the market is a person who expects securities prices to go up; a bear expects the general market to decline. The origin of these terms is unknown, but some suggest that they refer to the ways that the animals attack: Bears thrust their claws downward, and bulls move their horns upward. Bear markets last, on average, about 9 months; bull markets average 29 months in length.
Long-Term Investors Understand Market Timing
Long-term investors must be able to withstand some market volatility, the likelihood of large price swings in their chosen securities. Although they do not like to be described as such, some long-term investors are market timers. Market timing entails shifting your money into cash or bonds when you think stocks and stock mutual funds are overpriced and then later reinvesting your money in stocks and stock mutual funds when you think they have gotten cheap. Market timers pull out of stocks or bonds in anticipation of a market decline or hold back from investing until the market “settles down.” In this scenario, investors try to “time” their investments, hoping to capture most of the upside of rising stock prices while avoiding most of the downside.
To succeed in timing the market, you need to know just the right time to buy and just the right time to sell. Research shows that most of the market’s gains are realized in a few trading days that occur every now and then. If market timers are out of the market on those days, they lose. In times of rising markets, it is very easy for market timers to sell too early and as a result miss out on much larger profits as the bull market continues to push up prices even more. Those who sell after a sudden drop in investment value, a “down market,” actually lock in their losses.
Very few market timers succeed in simultaneously lowering their risk and raising their returns. In fact, research shows that most of these investors earn returns far worse than the averages, in part because they pay lots of transaction fees. The reality is that market timing increases market risk. Short-term buying and selling is more like gambling than investing. What contributes the most to successful investing is not timing, but time.
Very few market timers succeed in simultaneously lowering their risk and raising their returns. In fact, research shows that most of these investors earn returns far worse than the averages, in part because they pay lots of transaction fees. The reality is that market timing increases market risk. Short-term buying and selling is more like gambling than investing. What contributes the most to successful investing is not timing, but time.
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