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Investing for the Long Haul

Investing for the long haul is a passive investment strategy: investors buy stocks and hold them for a long period, regardless of short-term market fluctuations. You may miss out on extreme gains by investing for the long haul, but you’ll also miss extreme losses, which will give you invaluable security and peace of mind. In fact, a 20-year holding period has never delivered a loss on stocks throughout history.

Bad Markets

The typical investor is tempted to get out of a bad market by selling when prices are low, which is a poor strategy. The economy fluctuates between good and bad all the time, and those who constantly buy and sell will be hit the hardest in a bad economy. When you invest for the long haul, especially when you’re just starting out, you shouldn’t need to liquidate within the next few years. By holding on to your investments, you’ll be better able to ride out a down market, especially if your portfolio is diversified. Short-term fluctuations don’t matter as long as your investments do well in the long run, so you should be more concerned with the quality of your investments than the current value or past performance.

Cultivating Your Portfolio

The term “buy and hold” doesn’t mean investing and forgetting about it for the next 20 years. There are ways to cultivate and prune your portfolio while still maintaining your long-haul investing strategy. For instance, if a company you invest in changes fundamentally, you may not want to continue investing in them. If the market changes dramatically, as it has in the past, you may actually benefit from selling. Finally, your changing goals as you get closer to retirement may warrant a more conservative portfolio. Having a plan for cultivating your portfolio protects you from reacting emotionally to short-term market fluctuations.

Short-term Investing

If you decide to try short-term investing, make sure the amount you invest is the amount you’re willing to lose. Short-term investments see the most volatility, which makes this strategy too risky for the majority of investors. For dedicated professionals, this strategy is risky; for everyone else, it’s nearly impossible to make a profit. Often the majority of a year’s gains are seen in a short period of a few days, so those who practice short-term investing may miss out on those gains, where long-term investors are sure to be invested in the market at that time. To safely make money in the stock market, long-haul investing is the way to go.

Taxes and Fees

Frequent trading results in higher fees, so long haul investors pay less while fees eat up much of a day trader’s profits. Additionally, short-term gains are taxed at a higher rate than long-term gains. Even if you have the fortune of timing the market successfully, your profits will be diminished by taxes and fees.

Investing for the long haul is the best investing strategy for the majority of investors because it not only ensures modest gains but is also less likely to yield major losses. A long-haul investment strategy is based on informed, careful decision making and patience that is nearly guaranteed to help you reach your investing goals.

This blog is intended as a source of informative data for the benefit of RFM Financial Solutions’ clients and is not to be construed, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. The information provided herein is primarily obtained from public sources believed to be reliable but is not guaranteed and RFM Financial Solutions is not responsible for any damages or loss that may occur from taking action based on this information.

This article was written by Advicent Solutions, an entity unrelated to RFM Financial Solutions LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. RFM Financial Solutions LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2012,2014 Advicent Solutions. All rights reserved.

Accumulation is a key facet of reaching your retirement goals. However, we tend to see far less about portfolio drawdown, or decumulation—the logistics of managing a portfolio from which you’re simultaneously extracting living expenses during retirement. This can be even more complicated than accumulating assets. Read more

The Risks You Do Take Are Manageable

The good news is, even if you have to take some short-term risks you’d rather not, you can take the edge off in a number of ways. Diversification among asset classes may reduce marketwide or so-called systematic risk. In 2008, the bond market held up just fine even though stocks uniformly fell on their face. Holding assets that move in different directions at the same time makes for a smoother ride overall and gives you more options should you need to liquidate a portion of your holdings for some reason. Read more

There is no question that risk carries a negative connotation for investors. But the simple fact about risk is that it’s ever-present. There is more to risk than market volatility, and trying to avoid risk is like trying to avoid the oxygen in the room. You might think you’re avoiding it by sticking with safer investments, such as bonds. But when you make moves like this, you’re usually just swapping one kind of risk for another. In this case, you may have reduced short-term volatility risk, but you likely increased long-term shortfall risk: With a heavy emphasis on lower-yielding “safe” investments, your portfolio may not grow enough to meet your retirement needs or overcome inflation over the long term. Read more

Fund-flow data can be a useful for analyzing where investor money is going and how fund-flow trends are correlated with asset-class performance. Between 1994 and 2001, equity flows were higher than bond flows, but all that changed after the dot-com crash when investors started losing confidence in stocks. Read more

Accumulation is a key facet of reaching your retirement goals. However, we tend to see far less about portfolio drawdown, or decumulation—the logistics of managing a portfolio from which you’re simultaneously extracting living expenses during retirement, which can be even more complicated. Read more

Of course, holding a higher equity weighting also means higher short-term volatility, but that may be an acceptable trade-off when considering the bigger risk of running out of money prematurely. Read more

OK, folks, here’s what we’re asking you to do. First, save as much money as you can while you’re working, despite ongoing expenses. Next, figure out how to invest the money and, once you’ve gained critical mass on your savings, determine if it’s going to be enough. Is it any wonder so many pre-retirees are overwhelmed by retirement planning? Read more

Looking at where investor money is going may provide useful insight into what’s happening in a financial market. The image below illustrates annual flows for U.S. open-end mutual funds, divided by category: U.S. equity funds, international equity funds, and bond funds. Read more

Dollar-cost averaging—the practice of purchasing securities at fixed intervals and in equal amounts over time rather than in one lump sum—has long been used as a way to avoid jumping into the market at the wrong time. Read more