How to Determine When to Buy, Sell and Hold
Over the weekend, I was reading a well-known financial publication. Within a few pages of each other were stories quoting market experts. One said we’re in the “fourth quarter” of the bull market. Another said the bull had years to go.
My reaction: Who cares?
Sure, a bull market makes my job easier. More people want to read about the markets when stocks are rising. And it’s not as difficult to pick winning stocks in a bull market.
But a long-term investor shouldn’t get caught up in the bull or bear baloney.
Readers of my work know that I focus on Perpetual Dividend Raisers. These are companies that have track records of raising their dividends annually.
Let’s say you own shares of AT&T (NYSE: T), which has hiked its dividend every year since it was forced by the federal government to spin off the baby bells. That was 31 years ago.
If you’re a long-term shareholder who plans on holding AT&T for years and collecting its 5.4% (and rising) yield, do you really care if the stock falls 10% or even 20% next year?
If your plan is to use AT&T shares and its dividends to fund a college tuition or retirement in 10 years, does it matter if the stock trades at $30 in 2017? Or $50?
There are only two times when the stock’s price should matter:
- When you’re buying the stock.
- When you’re selling the stock.
If you are adding to your holdings, then yes, price matters. You don’t want to pay too much. Of course, if the stock slips 10% or 20%, you can buy more shares at a bargain. Like AT&T at $35? You’ll love it at $30.
But it’s the second scenario I want to focus on the most – when you’re selling a stock.
Many long-term investors let the market dictate whether they’ll buy, sell or hold a position. For example, when markets fall, investors tend to get worried and sell their stocks, often for a loss. When prices rise, they typically buy more stock, paying higher and higher prices because they don’t want to miss out.
Based on a study by Fidelity Investments, what investors should really be doing is… nothing. (Although, in my opinion, it’s usually a good idea to buy stock in a falling market.)
According to Fidelity’s research, its most profitable accounts were accounts that people forgot that they owned. In other words, accounts that were left alone for years performed significantly better than those that were actively managed by the account holder.
Think about that the next time you’re considering selling a stock into a falling market.
As long as the fundamentals of a company remain strong, don’t let yourself get shaken out of your position. You’ll make more money holding quality stocks (particularly strong dividend payers) over the long term than if you try to trade in and out of the market.
Get yourself a portfolio of great companies and try to “forget” about them for a while. Know your investing time horizon and remind yourself that if you need the money in 2025, a bear market or a 10% drop in the stock price in 2017 is like a promise from a political candidate – it means nothing.
P.S. In case you missed it, last week Marc joined healthcare industry experts Nicholas Vardy and Dr. Stephen Naylor for a free webinar on where to invest – and where not to invest – in the white-hot biotech sector. You can still view footage from this event online, but you must hurry… we’re taking it down Friday at midnight. Click here now to watch.
About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.