Deciding to invest is the first step towards making a conscious effort to accumulate wealth over time. The next step is deciding your main investing strategy.
Investing regularly, otherwise known as “time in the market” or “buy-and-hold” strategy, is a long-term passive strategy where investors keep a relatively stable portfolio over time, regardless of short-term fluctuations in the market.
On the other hand, timing the market involves trading in and out of the stock market or certain assets based on predictions of future price movements. If you’re a market timer, you’re likely a strong believer in sayings like “buy low, sell high” and “beating the market”.
While market timers do make headlines for massive gains in a short period of time, like hedge fund manager Bill Ackman’s 100x return on hedging against expected coronavirus impacts, it was not long ago that he made headlines for losing US$1 billion on a single stock in just a few months.
Long-term, buy-and-hold wins
Over the long term, market timing has often failed as a money maker. It is impossible for an investor to know exactly when to enter or leave the market – unless they are privy to non-public information. Due to the frequent buy and sell orders executed, market timers also have to pay more in transaction costs and broker commissions, in addition to paying daily attention to markets. In short, if you have a day job, market timing may not be your cup of tea.
Meanwhile, buy-and-hold investors of index funds – which track entire stock market indices – not only benefit from fewer ancillary costs, but also have historically seen positive returns over a long-term period. Warren Buffett, arguably the world’s most famous investor, said during the 2015-2016 stock market sell-off that investors should not watch market fluctuations too closely: “The money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
The research supports buy-and-hold: according to 2012 research by Charles Schwab, between 1926 and 2011, a 20-year holding period in the S&P 500 – an index that tracks the stock performance of 500 large companies listed on exchanges in the U.S. – never produced a negative result.
One of the oldest passively-managed funds is the Voya Corporate Leaders Trust Fund, established in 1935. The fund invested in 30 of the Great Depression’s major companies – including railroad, telegraph and radiator companies – and never expanded its investment ambit. Almost 90 years later, thanks to various mergers and acquisitions, the fund often outgains the index. Yes, this is an extreme case of buy-and-hold, yet it still works.
Investing Regularly with DCA
Dollar-cost averaging (DCA) is the most common strategy for buy-and-hold investors. Using DCA, you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market. You just have to ensure you invest in stable, blue-chip assets.