This post was written by Tomas Misson, a Popular Investor based in Italy. He has a Master’s degree in Management Engineering and currently works as a Data & Business Analyst at an ICT software company.
Your Capital is at Risk
The stock market is the only market with products on sale that everyone is too afraid to buy. It may sound illogical, but this is also exactly what happens when there is only a small percentage change in the market: when it falls, investors get frightened and sell everything in a panic, whereas when it rises, everyone rushes onto the market, justifying their actions with a few classic excuses. This is the perfect representation of the maxim: “Buy High and Sell Low.”
But what are the three great excuses investors use when they invest in the market?
Excuse no. 1: “I don’t like these shares anymore, I’m selling”
This is the typical excuse used by investors who let themselves be run by their emotions; they need the thrill and adrenaline, as if they were at a casino. This desire typically comes from the mistaken idea that to achieve huge gains, a successful investor must trade every day, but the reality is quite different:
- It is true that investing intelligently is less exciting, but it is even more true that the only fail-safe way to make money in the stock market is to hold your investments for a significant period;
- Most investors enter and leave the market at the worst moments; missing those key opportunities that make all the difference.
To obtain profits, then, it is necessary to keep your investments for an extended period, as that is the only way to receive the benefits of a top company’s success. In fact, successful companies tend to increase their profits over time, and are rewarded with higher share prices, thus, bringing higher profits to those investors who hold their shares.
Excuse no. 2: “I’ll reinvest next week, when the price is lower”
This idea often forms in the minds of aspiring investors while they wait for prices to fall. But the reality is that markets are unpredictable, especially in the short term, making it impossible to know whether they will rise or fall in the coming weeks.
This way of thinking may be motivated by two different conditions:
- Greed, or wanting to get the best price at any cost
- Fear, or the feeling of panic in the face of temporary financial losses if the share price falls
In both cases, the risk is of losing an opportunity in which to invest, given that no one can guarantee that the price will actually fall in the coming weeks.
Excuse no. 3: “I prefer to wait until the market is stable enough to invest in”
This last excuse typically comes up after the market has experienced a fall, either share values declining for a few days or a long-term fall. The problem is that when investors say they are waiting for the market to be stable again, what they really mean is that they are waiting for prices to rise again, and inevitably pay a higher price for the shares they want.
This way of thinking comes from so-called loss aversion, or a preference for avoiding a short-term loss rather than obtaining a long-term profit, which can cloud the investor’s judgment.
Still not fully convinced?
If you remain unconvinced and believe short-term trading is the best choice, think about this:
- If, in the last 15 years you missed out on the top 10 days of the S&P 500, an annual yield of 10% would have fallen to 5%;
- Had you missed out on the top 20 days, your yield would have been only 2%;
- Missing the top 30 days of the last 15 years, you would have made a loss of 0.4%.
Average annual returns based on the number of best days missed in the last 15 years
This graph makes it clear that any deviation from average S&P 500 returns is translated into an accelerating downward trend, which soon leads to a loss.
To conclude, it can be shown that if an investor retains their investments without constantly monitoring the markets, they may earn at least double what is earned by someone who makes and then mistakenly drops investments less than once a year. Given that it is impossible to know in advance which days will be the key ones, retaining your investments is the only way to enjoy the benefits of all these days, without having to worry about short-term oscillations.
Your Capital is at Risk
This is a marketing communication and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared utilising publicly available information.