You might be wondering just how difficult can it be to buy and hold a stock. After all, the idea is to buy and then do nothing. Why do you need a strategy? If you’re asking that question then you’re probably new to the stock market. Or you’re a veteran who forgot how difficult it is to buy and then do nothing because it became second nature to you.
In this post, I’ll be going over why buy and hold is so difficult and what you can do to be able to hold your stocks through tough times.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is only for entertainment and educational purpose only.
Why Buy and Hold Is Tougher Than It Seems
In order to be able to hold your stocks, you’ll need to change the way how you would naturally react. As a human being, we have a fight or flight response when we see the price of the stock goes down. Since you can’t fight, the only option is to choose flight. Flight in this case is to sell.
Without training yourself to avoid the flight response, each time the price goes down your natural instinct will take over causing you to sell. So, what can you do to train yourself to overwrite your flight response? Well, it comes down to having the right mindset. The right mindset will take time and experience to build. There are two mindsets, which are investor and trader, and for the case of buy and hold, it is the investor mindset.
Understand What You’re Holding
Many investors don’t know what they’re holding. That’s surprising to hear especially since you have your hard earn capital in them. Does that mean you need to know every detail of each company that you hold? Well, ideally yes, but then you’ll probably only have the stock of one company. So, in practice, you don’t need to know every detail, but you should know the following:
- What the company do
- Who their customers are
- What is their financials like
- What is their growth rate
- What are the future plans of the company
Follow Your Companies’ Progress
It is important to keep up-to-date with the execution of the companies you’re invested in. Are they meeting their targets? Have they partner with others or acquired other companies to grow? Are the companies moving in the direction you believe they would be going? These are all fundamental questions you need to know about your companies to give you conviction to hold.
Embrace the Idea That Stocks Don’t Only Go Up
If you have been in the stock market long enough you know stocks don’t only go up. There are times when prices come down too. It is not fun to see the red, but it is important to keep the upward direction moving. Each time the price drops or consolidates (move nowhere), it tends to continue with the long-term trend.
uptrend example
What exactly does the long-term trend mean? Let say you try to draw the best fit line from the price of a stock day by day. If the line is going up then it is an uptrend. After a price drop or consolidation, the price would continue the uptrend. The opposite would be the case for a downtrend.
By taking a step back and looking at the long-term trend, you’ll realize a few down days doesn’t mean much.
Price Going Down Means You’re Getting a Discount
We all like discounts. When you go to the grocery store, if things are on sale you’re happy. Why is that not the case when it comes to the stock price? In the short-term, the price being down is painful because you have some paper losses. However, from a long-term perspective, you’re just getting a nice discount when the stock goes back up.
At the end of the day, there will be times in the market when the price goes up and other times when the price goes down. As long as you have done your research on the companies you are invested in, it is easy to hold even when it feels like the sky is falling. You might even consider buying more when that happens. When such a way of thinking becomes the norm for you that’s when you know you’re doing well as a buy and hold investor. However, this doesn’t mean you just buy and hold unconditionally, there are situations where it makes sense to sell. That will be a topic for another day.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.