One of the many common questions that you might ask yourself as an investor is how long to generally hold on to a stock and when to sell it. Stock prices are mostly volatile and can heavily fluctuate in both directions. Sometimes it can be daunting to see your investments constantly moving up and down especially within short time periods.
A keynote to know about stocks in general, is that they constantly go up and down in the short run but have always risen in the long run.
"In the short run, the market is a voting machine, but in the long run, it is a weighing machine."
How Long Should You Hold a Stock?
The amount of time that you want to hold your stocks will completely depend on your investment style and strategy. For fundamental investors, it is generally better to hold stocks for the long term, meaning at least months and preferably a decent amount of years. Holding stocks for short time periods is rather considered speculating instead of investing and will essentially increase your risk of losing money in the long run.
The length of your investment time frame will be based on what kind of investment style and philosophy you want to follow. In the end, it all comes down to how you think about markets. If you are a buy-and-hold investor and you have already decided to hold your chosen investments until you retire, you shouldn’t worry too much about any short-time price fluctuations.
Short time price fluctuations are oftentimes emotionally driven, and you may become a victim of market sentiment and sell your investments as soon as you see them drop in price if you let your emotions instead of your rationality control your reactions.
In general, it is better for most investors to hold their stocks for the long term. Even if the market crashes and your investment positions drop by a noticeable amount, as long as you understand that the market will eventually recover and you’re still confident about your investments, you shouldn’t be immediately frightened by a sudden market downturn.
If you sell your investments in such conditions you are letting your emotions taking control of your decision making.
The Power of Long-Term Investments
Most people are aware that investments, such as stocks need time to compound and grow on themselves in order to become a considerable amount of wealth. There are many examples of companies out there that would have made you an incredible return as long as you didn’t sell them and instead went with them through economic downturns and market crashes.
A good example for such a stock would be Berkshire Hathaway. The holding company has a long history of multiple decades and is today still amongst the most valuable companies in the world.
Berkshire’s stock also outperformed the market by miles during the past decades.
Source: Business Insider
If you invested $1,000 in Berkshire Hathaway 50 years ago, that $1,000 would be worth millions of dollars today. That shows just how incrediblly powerful choosing the right company and holding on to it as long as possible can really be.
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
»Learn more about the benefits of long term investing
How Well Do You Know Your Stocks?
Let’s assume that you bought a stock of a company that you firmly believed in a few years ago. At that time, it was growing consistently, had stable financial health, and was trading at a reasonable price.
Suddenly you see a huge price drop of its stock within only a few days. Everybody in the news and media is shouting how bad the business is, and that it had no bright future to come.
You comprehensive all that negative information but conversely, you know that the business is only going through some small hardships and everybody is overreacting to those events. Nothing fundamentally groundbreaking has changed within the company and it still has a strong financial basis.
In other words, if you know that you are still dealing with a great business even if its price drops, it is only logical to not sell your stocks. Furthermore, the next reasonable step would be to buy more shares of the company, as those are now sold at an even bigger discount than what they’re truly worth
That being said, this can be very difficult to pull off if you aren’t exactly sure about your given assessment of the company. Investors that don’t know what they are owning shouldn’t really actively invest in the first place, since they are running into the risk of facing such choices without knowing what to do. As a result, those kinds of events can either be turned into opportunities or burdens for the investor, depending on how they are going to act on it.
How Long to Hold a Losing Stock
In the case where investors keep seeing their chosen stock falling in price without an end to come, the only question that they should ask themselves is, if they still truly believe in their company that they have invested in.
If you still hold on to your stock with the hope that it will somehow recover, you are not rationalizing anymore but rather behaving out of your pure emotions. Remember that stock prices can always continue to fall even if they have already plunged and that you as an investor won’t be able to predict when that is going to end.
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
How the Greatest Investors Are Doing It
As already mentioned earlier, it all comes down to what investing strategy you follow and what type of investor you are.
Since reality has shown that most retail investors shouldn’t follow any short term trading philosophy based on technical indicators if they wanted to make consistent and stable returns in the long term, it would make sense to do it just like legendary investors such as Buffett, Templeton or Lynch have done it.
»Learn more about value investors to learn from.
That implies to rather focus on the long term and pick investments that you understand and would still be confident in if the stock market would close tomorrow and you had to own the stock for the next 30 years.
This doesn’t necessarily mean that you should always own your chosen stocks for the rest of your life. Especially when you see any beneficial opportunities where you could make a good profit. For instance, when the market heavily underestimates a company and the stock prices rebounds, after the market recognizes its value.
It can be very beneficial to think with this kind of mindset when picking any of your investments. You can always ask yourself this question: Would I be willing to own this company for the rest of my life?
And as soon as your stocks fall in price due to an economic downturn or any other negative event, you should only consider pulling your money out if you don’t believe in your company any longer because its fundamental characteristics have changed. That being said, this scenario shouldn’t happen too often as long as you’ve chosen great and valuable companies in the first place.
Conversely, if you aren’t too familiar with the exact companies you are holding, maybe because you’ve chosen a passive investing strategy by investing in ETFs or mutual funds, you shouldn’t worry too much about any short term events and price fluctuations.
If given a long enough investment horizon, you should be able to ride out the lows of any downturns. Remember that over the long term, the stock market performance has always turned out to be positive.
Conclusion
Any investor that follows a passive investing approach should already know that the stock market as a whole is likely to bring an annual return of about 6-8% over the long-term.
However, the market’s future performance is never certain and can’t be fully predicted. The exact annual return that is going to apply to you may be higher or lower than the expected performance. And this return may even deviate to a much bigger extent the shorter your investment time frame becomes.
Note that the stock market has always gone up in the long term and that it’s almost certain that you are going to make a positive return if you just stay invested for the next few decades.
The primary factors that you may want to keep an eye on if you are actively investing, are any fundamental changes within the businesses that you’ve invested in that might change their future prospects.
