Buy and Hold

This guide advocates an investing strategy called buy and hold. This strategy suggests that you:

  • Acquire a diversified portfolio of stocks and bonds,
  • Continue investing on a regular (and, ideally, automated) schedule,
  • Rebalance your portfolio every year or so, and
  • Don't sell for decades until you're ready to start withdrawing.

This last point is critical, but it's often difficult.

Here's why it matters. This logarithmic graph shows the Dow Jones over the last hundred years:

Dow Jones historical graph

Look at this chart. How can anyone lose money in the market? It's a virtually relentless march upward.

People usually lose money by trying to dance in and out of the market, buying when they think it's about to go up and selling when they think it's about to go down.

You are not good at this. Vanishingly few people are, even professional investors, and no one can predict stocks reliably across a broad segment of the market. You may win once or twice, by luck, but it's effectively impossible to consistently time the market's ups and downs.

The alternative is to accept that booms and busts will happen, that you can't predict them, and to simply try to make your peace them. After thirty years those relatively minor spikes will have smoothed out, and you'll be better off for having ignored them.

The slogan of buy and hold investing is that “time in the market is more important than timing the market.”

The Value of Doing Nothing

There are numerous other good reasons to avoid moving money around:

If you happen to be holding assets in an actively managed fund, fund managers often take a fee for buying and selling stock, even within an established fund. This is an additional reason to use passive index funds.

Additionally, the capital gains tax applies to stock appreciation. Gains are categorized as either long-term (taxed at 15%, usually), or short-term (taxed as normal income, generally somewhere between 20%–30%). The sale of assets that were purchased within the last year is subject to the higher short-term capital gains tax. Not selling recently purchased assets, on the other hand, can significantly reduce your tax bill.

How To Not Freak Out

This is all easy to say now, after a ten-year bull market, but how can you avoid panicking when half your savings disappears after a crash?

First, remember that you're not literally losing anything when the market dips—you just own assets that are currently undervalued. You'll only realize those losses if you sell.

By owning diversified stocks, you own a fraction of the world's economy, and the size of your fraction is just as large after a dip as it was before. That fraction represents factories, ships, tons of human capital, and other productive assets. Those things are all still around, and their productive capacity isn't much different than it was before. Things will almost certainly be fine.

Second, try to re-frame the dip as an opportunity. You'll still be buying stocks regularly, but they're on sale now! You're getting more for your money.

Third, perhaps you can consider it this way. Either:

  1. The market with improve, and you’ll be better off for having stayed in, or
  2. Civilization is ending, and your balanced three-fund portfolio has no meaning in the apocalyptic hellscape to come. You should've invested in gold coins, canned beans, and ammunition.

If you're not currently fortifying your home to guard against mutant scavengers, everything will probably be fine.

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