Let's assume that you bought at near the beginning of the purple line as listed on the chart below. The beginning of the purple line coincides with 6th of February 1996 and at that point of time, the STI was at a level of around 2493. Unfortunately, as you can see from the chart, STI went on a decline. It will take you another 1416 days or close to 4 years before you will break even on your investment on the 2nd of January as seen by the end of the purple line.
What if you decide to hold your investment since it is suggested that you should hold your investment for a long period of time ? Another breakeven point will occur on the 2nd of October 2006 at the end of the blue line which will take 3881 days or around 10 years and 7 months. If you still decide to hold your investment, you will suffer a paper loss on your investment as signified by the green circle once again although you will enjoy some minor gains currently as the STI approaches the level of 3000. And that is after holding your investment for around 14 years.
As you can see from the scenario I painted above, a long period of time can really be long. I'm not suggesting that investing for the long term is a wrong concept. To me, it is a sound concept but that comes attached with conditions. So what are the conditions that you should take note of ?
- Point of entry is of utmost importance. As illustrated above, buying near the peak will result in poor returns on your investments. Even if you did not manage to sell out near the peak but if you had bought near the bottom, you will still be sitting on a respectable amount of return after a long holding period.
- Choice of investment is of utmost importance similarly. Buying a stock of a fundmentally lousy company and holding it over the long term will not yield you any decent return. The choice of investment should be an investment that has a strong tendency to rise in the long run such as index funds, ETFs that tracks major indices or a diversifed portfolio consisting of stocks of fundamentally strong companies.
Posts
i was wondering what is your opinion on holding defensive dividend yielding shares.
ReplyDeletebought right, you can afford to wait till years and you will still be collecting good income while waiting.
i written something similar to yours here at my blog >>
http://www.investmentmoats.com/money-management/dividend-investing/dividend-investingit-matters-when-you-buy-the-stock/
I've always find your blog writing pretty decent material, but this latest post is just pure bullshit.
ReplyDeleteFirstly, your post have demonstrated that you have a misconception on what is long term investing.
1) You left out the RSP portion which goes hand-in-hand with long term investing. Nobody invest a lump sum at some time A and then leaves it there until retirement. Investors make regular investments across the entire period till retirement.
2) You left out rebalancing, which has the natural effect of taking profits when stock prices go up, and buying more stock when the market plunges.
Trying to time the point of entry is just pure speculation. Nobody can time the market consistently and correctly over a long time. That's a proven fact by over 2 decades of academic research.
Hi Drizzt,
ReplyDeleteIrregardless of whether I'm buying dividend stocks or growth stocks, I'm more focused on buying sound companies cheaply. And that can includes dividend stocks too. If one pays too high a price for the stock of companies, the dividends collected over the years may not make up for the capital losses that may happen. That is analagous to the cases where I seen many being lured by the high interest rate of foreign currencies, only to suffer a loss on their investments when the movement of the currencies result in a capital loss which is more than the yield offered by the interest rates. Of course, the best scenario is that one buys a dividend stock below its intrinsic below and over the years over holding it, the market price the stock correctly or even overprice it, resulting in capital gains while the dividends accumulated over the years coupled with the effect of reinvested dividends is likely to produce a respectable return.
Kay
Hi Garrett,
ReplyDeleteThanks for your comments and your contribution. The purpose of this post is to illustrate and discuss more about the meaning of 'long' in investing for the long term. Not many are aware that the meaning of long term can really be that long and it happens when one buys in a stock market during the period where the market prices the stock way above their worth and that often coincides with market peaks.
Long term investing is not synonymous with RSP although the opposite holds true. Not all investors use a RSP. There are investors who buy sound companies below their intrinsic value in lump sums and hold it for the long term. There may also be other investors who will wait patiently by the sidelines and simply take up positions only when the market plunges. I agree with you that timing the market is pure speculation and I do not encourage that at all. But one can choose to buy in objectively when the market is priced below its worth and that often coincides with market plunges and troughs. And this often makes it seems like one is trying to time the market.
Kay
Hi Kay,
ReplyDeleteI've thought about this before as well. I believe in the merits of long term investing. But exactly how long is long and when should one decide to sell an investment that he's been holding on to. I think a fundamental purist would probably say that as long as the fundamentals of the company remains sound and good, there isn't a need to sell.
At the same time, i'm thinking it might make sense to sell if a company/the market has already reached a point of being way overvalued.
I must say that at this point, i've yet to reach a firm conclusion on when should a stock be sold.
I tend to agree with Garrett on his views, though I will refrain from using such strong language to describe this post. Let's just say the discussion here is "purely academic". Many observers of the stock market have used a similar argument against buy and hold, while others who are against active trading also use different points in the cycle to illustrate their thesis. Let me even the field by saying that as long as you have 50+ years or more of data, you can use whatever stats you want to arrive at any conclusion. It's a matter of how you package it, and how it is presented.
ReplyDeleteBack to the topic wise, I think a misconception is that one should track the companies one is invested in, rather than the "market". Market levels are not even representative across periods due to (I think you should know this) survivorship bias, which means components of the Index are regularly replaced like Cosco being replaced by CapitaMallsAsia. So using the "Index" to gauge long-term returns is something of a misnomer, as one cannot use this even as a general guide for stock prices of any particular company at all.
Ultimately, to invest successfully, one has to track the business of a company. This is what I firmly believe in. Ignore the so-called experts and just stick to your knitting. Have patience and fortitude and avoid big mistakes and you will come out ahead over the long-term.
Cheers.
Hi Royston,
ReplyDeletePersonally, I will sell a stock if the fundamentals for the company has deteriorated or if the stock is way too overvalued. As a general measure, if i perceive that the capital gains from the sale of a stock is going to be much higher than the future cash dividends flows, then I will choose to sell it.
Kay
Hi Musicwhiz,
ReplyDeleteThanks for your comment. At the end of the day, there are many roads to achieve the same objective. Hopefully, I can achieve my targeted annualized return for the next decade.
Kay
Hi,
ReplyDeleteQuick question. What's RSP? Couldn't figure it out. Thx a bunch.
Hi Aspire,
ReplyDeleteRSP = Regular Saving Plan.
it means to invest regularly (i.e monthly, quarterly, annually). for some people like myself i would do RPS when there is a down market.
i hope this clear your doubts :).
thank you
Suen
Hi Kay,
ReplyDeleteI was wondering if dividend investing can be a source of passive income for retirement ? I remember that I heard finacial advisers advise aginst investing in stocks in retirement years?
What do you think ?
Thank you
Regards
Phyllis
Hi Phyllis,
ReplyDeleteThe reason why stocks may not be such a good investment in the retirement years is because of the volatility. It depends on how you look at it. If you are depending only on the dividends from stocks and not on any capital gains, I think it should be fine. Besides, you can bequeath the stocks to your loved ones after you passed on, making stocks as a long term investment indeed. On the other hand, if you are dependent on the capital gains, then it is not recommended since stocks are volatile. Another thing is I am not sure on how would one take it if they see the value of their stock investments plunge in their retirement years even though it may rise in the long run. Some may not be able to take it easy regarding this issue. Lastly, as compared to buying bonds, your capital is not protected in some sense. As compared to bonds, where your capital will be returned at the end of the holding period along with the coupon payouts, a stock does not offer this. As such, you must be knowledgeable enough to pick stocks of sound qualities and have a diversified portfolio.
Kay
Hi Kay,
ReplyDeleteThank you for your advice.
Do you know if we have shares bought using the CPF, can we pass to our children when we die ? How to do it ?
Thank you
Regards
Phyllis
Hi Phyllis,
ReplyDeleteYou can take a look at this link. http://www.cdp.com.sg/business/transfer_estate.html. I hope this helps.
Kay
Hi Kay,
ReplyDeleteThank you for the information. But in the hyperlink, there is an item called asset schedule. What is an asset schedule ?
Thank you
Regards
Phyllis
Hi Phyllis,
ReplyDeleteUnfortunately, I'm not sure of this term. It seems to me that it is referring to a list of all the assets owned by an entity but I guess that may not be applicable to an individual.
Kay
Just another one of those misconceptions about stock investing.
ReplyDeleteIrregardless of whether I'm buying dividend stocks or growth stocks, I'm more focused on buying sound companies cheaply. And that can includes dividend stocks too. If one pays too high a price for the stock of companies, the dividends collected over the years may not make up for the capital losses that may happen. That is analagous to the cases where I seen many being lured by the high interest rate of foreign currencies, only to suffer a loss on their investments when the movement of the currencies result in a capital loss which is more than the yield offered by the interest rates. Of course, the best scenario is that one buys a dividend stock below its intrinsic below and over the years over holding it, the market price the stock correctly or even overprice it, resulting in capital gains while the dividends accumulated over the years coupled with the effect of reinvested dividends is likely to produce a respectable return.a3trading
ReplyDelete