| Real Life Strategies for Building Wealth

time to buy shares, not to sell

Last Friday was a good day for shares; it was a day when most of us could understand why it is time to buy shares, not to sell.

Most days lately are not like that. On most days I look at my stocks and shares investments and I want to sell, cut my losses and hide under the bed.

Do you feel the same? Do your fingers itch to press the ‘sell’ button before something even more dramatic – like losing absolutely everything happens?

You are not alone. Hundreds of thousands people around the world are doing exactly that: they are selling their shares. Some withdrew from the stock market when the first tremors happened last August; some even managed to get out of it before that.

Here is the thing:

Now is time to buy shares, not to sell!

And I know that it sounds like the most warn out cliché in the book of warn out clichés. Thing is though that it is true.

You see, I won’t bet my house that the stock market will recover: this will be a tad extreme. Still, looking at the past, we can have every hope that markets will not only recover but continue to go up.

We should remember – and keep in mind at all times – that over the last hundred years the stock market has returned an average of 10.4% per year. You don’t believe me?

Have a look at this graph:

time to buy shares, not to sellYou know what is important here? What is important is that what is happening at the moment looks scary from where we are at the moment. Still, the long term direction of the markets is up and what scares us today is nothing but a small down blip in stocks and shares investing.

I know what you are thinking; the same thoughts are going through my head as well.

I really don’t want to lose my hard earned cash

This is a hard one, isn’t it?

You’ve worked hard for this money. You’ve saved even harder. Seeing it disappear off your investment account fills you with regrets because:

  • You could have spent it on something you always wanted to do;
  • You could have put this money in something safer (like as savings account);
  • You could have predicted the ‘crash’ and taken your profits.

Take a hard look at your regrets. If these are anything like the ones I mentioned you should snap out of it immediately. Because all these regrets (all regrets) don’t help at all to deal with the situation – they are in past and there isn’t much that can be done to change that. Apart from that:

  • If you spent the money you’d be where you are today: your hard earned cash would have disappeared.
  • Putting your money in a saving account only means that you are losing it all the time; you just don’t notice it because it is gradually eroded by interest rates lower than inflation.
  • Oh, and you couldn’t have predicted the crash; it is a ‘black swan’ or one of the events that happens because of what we don’t know not because what we know.

Now, cut off the regret, the feeling of loss and the impulse to ‘save what is left’. Just look at the graph above and sit it out.

There is no guarantee that this will blow off

No, there isn’t. But if the past tells us anything about the future, it is that things adjust and the stock market adjustment is up.

The fact that it’s been going up for 100 years means nothing to me

You are right: the fact that the stock market has been going up for the last 100 years – and may go up for another hundred – doesn’t mean that it will go up over the next ten years.

I’m not a vampire and I’m assuming that you aren’t one either (though The Money Principle welcomes variety). For us, simple mortals, what happens in the next ten years is more important than what happens over the next hundred.

I get that!

But…

If you look carefully at the graph of returns (if you are curious you can check out the original article) you’d notice that there has been only one decade during which the stock market return has been negative and it was immediately before WWII; it has not been astoundingly great always but it is positive. If things are that bad, the stock market is the least of our troubles.

If you can’t wait ten years you shouldn’t be invested in stocks and shares.

Also, you remember that investing in Index Funds (or other ‘basket’ investment instruments) is much safer than investing in individual stocks.

Except if you are really good at it. And even then Index Funds are still safer.

Still not convinced that it is a time to buy shares, not sell?

Let us look at what is behind the rise and fall of the stock market

There is one thing on which most agree: that stocks are volatile and whether they rise or fall depends on supply and demand. If you look for an answer on Investopedia, you are likely to learn about ‘market capitalisation’; all you need to remember about this one is that the dynamic part is the price of the shares, not their number. Supply and demand, you see.

If you look for an answer on AllBusiness.com you’ll realise that it is important to understand what makes people like, or not like, a company. There are the usual suspects, like company news; organisational restructuring and management; mergers, acquisitions and other close agreements etc.

Let me tell you: these all matter.

What matters more is the following:

  • The stock market fluctuates (rises and falls) because of the interplay between two emotions: greed and fear.
  • When sufficiently large number of investors (or few investors with a large number of shares) see stock prices rising they get greedy and buy; this pushes the price even higher (remember demand and supply?).
  • When sufficiently large number of investors (or few investors with a large number of shares) see stock prices falling they get scared and sell; this pushes prices further down.

What makes share prices rise and fall is the ‘cycle of fear and greed’ within which large numbers of investors are locked.

Do you buy when shares are going up and sell when they are going down?

Be honest!

If this is your investment pattern, you should stop investing in the stock market because you’ll always be on the losing side. Better use the money to have the holiday of a life time and work till you can.

Time to buy shares, not to sell

Here is what the ‘cycle of fear and greed’ looks like:

time to buy shares, not to sell

Now, most people buy when stocks (the market) are going up and sell when they go down. For obvious reasons, I’d refer to this investing pattern the one of ‘an emotional looser’ – it is quite clear that if you buy expensive and sell cheap you don’t make money on your investments. This is what that investing pattern looks like:

time to buy shares, not to sell

Few investors, the really great ones, learn to control their emotions (greed and fear) and use an investing pattern that is the exact opposite of the one above. This patter is the ‘smart investor’ one and it looks like that:

time to buy shares, not to sell

In brief, smart investors buy when stocks are cheap (because mass fear has kicked in) and sell expensive (when mass greed has taken over).

This is the only way to make money on the market; any market.

At the moment, we are at the fear cycle and smart investors buy while keeping their eye on the long term game. Emotional investors sell.

Are you smart or emotional?

Crunch time, my friends.

Which one are you? Are you a smart investor with long term vision or an emotional investor who sees no further than the end of your nose?

And before you think that I sound like a smug and patronising b*tch let me tell you: I used to be emotional. I’m still tempted and have to work hard to not seccumb.

Only five years ago, I would have broken down and begged John to sell. (In fact, I did beg him to sell the house before I decided to buckle up and pay our debt off but this is another story.)

Now I know better. I have just transferred cash in my TD Direct Investing account and tonight I’m going shopping for more shares. And while I’m at it, I’ll probably add some money to my Nutmeg account.

PS: I did buy more shares – I bought Skyworks Solutions (SWKS) and it lost 2% yesterday. It will go up.