Not a day goes by without someone suggesting that I sell my investments because of a potential doomsday scenario. Yet, I always respond that the best move I could make is to just stay the course. Standing by and doing nothing is perhaps one of the most crucial concepts for good long-term returns.
It’s extremely difficult to time the market. Market timers need to buy low and sell high, even though no one knows until after the fact when those points are. Market prices generally already factor in all available information, so the recent bad news you’ve heard about is already included in the prices. In order to sell before a market drop, you have to know about a negative event before it happens. You also need to pay taxes every time an investment is sold at a gain.
You’re much more likely to come out ahead at retirement if you buy and hold over the long term. This strategy allows you to avoid many fees, minimize taxes and capture the overall returns of the market. Here are some examples of how staying the course pays off:
Buying and holding real estate through the financial crisis. The great recession wiped out many real estate investors. The housing market fiasco of 2008 and 2009 was easily the most devastating drop in real estate values in our lifetime. Yet, a real estate investor who bought and held a property would have made out handsomely during this period. For example, you could have easily refinanced a mortgage with a 30-year fixed rate of 6.5 percent to a loan with similar terms for 3.5 percent during the recession. The 3 percentage point difference would significantly decrease your monthly payments. The monthly payment on a $300,000 30-year fixed-rate mortgage at 6.5 percent is $1,896, while the same loan with a 3.5 percent rate would cost you $1,347. That’s a $549 bump in cash flow just on the mortgage rate alone. And if you rented out the property, the substantial rent increases since 2008 would further increase your profits from the building.
Keeping bonds through the imminent rate increase. So-called financial experts have been warning for years that the Federal Reserve is about to raise interest rates, which will decimate bond values. It’s true that the value of bonds decreases as interest rates rise. But bonds have had a fine run over the past several years. The Vanguard Total Bond Market Index Fund has earned about 3 percent annually over the past five years. And the Vanguard Long-Term Government Bond Index Fund Admiral Shares, a fund that tracks bonds that stand to lose the most when rates rise, had average returns of 6 percent in the past five years. Simply put, you would have done just fine if you stayed in bonds all these years.
Of course, buying and holding only works when you are buying a solid investment to begin with and the investment isn’t one that has a chance of dropping to zero. This rules out individual securities where the company has a real chance of failing, taking on significant debt to buy more real estate that you can comfortably afford and other complicated investments where there are layers of fees to be paid.
If you are sacred of what could happen to your investments, pick a dependable strategy and stick with it. You will be pleasantly surprised decades from now when you are about to retire.
David Ning is the founder of MoneyNing.com .
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How to Stay the Course When Others are Panicking originally appeared on usnews.com
