Why Long-Term Investor Over Short-Term
Long-term investing is delayed gratification, whilst short-term is income-orientated. The stock market has averaged 9% per year over the long term. Vanguard has a suitable ETF for long-term passive investors. Bearish signs on the S&P 500 and Gold in the short term, but Gold in the long term looks attractive from here. This is an important question to ask yourself before you invest capital into the markets. “Start with the end in mind” is a good question to ponder over your investment goals. Do you want to be active or passive? Do you want regular income or are you going to leave your money to compound over time? What about day trading? The answer to these questions is going to be different for everyone but they are definitely questions you should ask yourself before you start investing. Let’s discuss some long- and short-term set-ups at present so you can have a better idea on the strategy that suits your personality the best. So what’s your end goal here if you want a career in investing? Well there are 2 extremes. You can learn to become a compounding long-term giant like Warren Buffett or a day trader or even a high-frequency trader where your sole objective is daily income. Long-term investors do their due diligence on multiple companies, and usually hold onto their underlyings for at least 6 to 12 months, if not years, before thinking of liquidating. Day traders and short-term investors, on the other hand, mainly look at charts, moving averages, volatility and sentiment in order to predict short-term direction. Long-term investing brings many advantages. You are not glued to your screen everyday watching for every uptick. Professional investors’ “modus operandi” is to thoroughly research companies and then make their decisions accordingly. This is where the big gains are because you are effectively an insider. You know information about startups that the public doesn’t. If you want to be in this game full time (this being your career), I believe that is the end goal. Nevertheless, not everyone has that sort of time when starting out, so let’s take a look at the steps you could take to get to your end goal faster. Most investors are definitely passive, as there are constraints on their time. This is definitely the best way to start out. There are many vehicles such as (NYSEARCA: VTI ) that average between 8% and 9% before tax annually over the long term. It is very difficult to beat the market when starting out, so this is a good strategy for an investor starting out on their career. Compounding works over time in your favor, and if you start out with a sizeable balance and also add to it regularly, it can turn into a sizeable amount of capital after some time. Every “saver” should adopt this approach as it is extremely difficult to get rich on savings alone. In our 1% portfolio, we have many equities that we will not sell at a loss because we are adopting the above principle. Our chosen equities will at least match the returns mentioned above. Many investors talk about the 2008 crash and how equities lost 50% of their values. However, many quality blue chips recovered and now have much higher prices than 2007. Let’s take a look at 2 of our holdings in our portfolio, Kellogg (NYSE: K ) and Coca-Cola (NYSE: KO ). We are not putting stop losses on these underlyings. Take a look at charts below to see their action over the last 10 years. (click to enlarge) (click to enlarge) As you can see, both companies recovered after the 2008 crash and for good reason. Both companies are leaders in their industries and cash rich. Even when stocks were plummeting in 2008, these companies raised their dividends. Kellogg has now raised its dividend for 10 straight years, and Coca-Cola has done the same for 52 years straight! Both are now yielding just under 3% for shareholders, but the yield was far higher in 2008 as dividends and stock prices converged. These stocks should definitely at least match the stock market going forward. This is why we will never sell them at a loss, as we know they will recover over time . These types of stocks give you a buffer (support) through good fundamentals and increased dividends. Let’s look at Gold also over a 10-year period. Gold has definitely been in a bull run since 2000. Have a look at the chart below of (NYSEARCA: GLD ) (ETF that tracks the price of Gold) to confirm. (click to enlarge) The startling fact is that amidst all the doom and gloom surrounding Gold recently, the precious metal is still up almost 180% over the last 10 years, which beats the stock market by double. With all the easing measures that central banks are adopting at present, Gold should rise from here if the bankers can’t halt deflation in its tracks, so I see no reason for selling Gold now, assuming you are a long-term investor. Nevertheless, let’s now look at short-term outlooks for both the stock market and Gold. Obviously, if the stock market corrects, our selected underlyings will also correct and definitely the stock market is more overbought now than Gold (period of 3 to 5 years). Look at the chart of (NYSEARCA: SPY ) below. As you can see, the S&P has run through its 50-day moving average, but more importantly, the trend line from the October lows last year to the December and January lows have been broken. This should imply downward action in the stock market for the next month or so but the slide may be halted by the upcoming FOMC meeting, which takes place on the 29th of this month. These meetings have acted as support for the market in the past, so I wouldn’t be surprised if the meeting puts a temporary floor under the market yet again later this month. (click to enlarge) Gold in the short term doesn’t look that attractive either. The volume in (NYSEARCA: DUST ) has spiked (see chart). This is an inverse leveraged ETF (x3 in the mining sector), and usually gives good predictions about where the mining sector is going in the short term. (click to enlarge) Also, when you look at the chart of (NYSEARCA: GDX ), you see that the mining ETF has printed a bearish candle in the last few days and the RSI levels are rather high. (click to enlarge) So how do you want to invest?. Do you want to hold through the down moves or sell? (passive or active). You need to answer this question before you start investing. Neither one is right nor wrong but one thing is clear. If Gold goes to the stratosphere, the long-term Gold bulls who own low-cost ETFs or physical will do very well. They have less trading costs, less headaches about short-term movement in price and obviously more compounding of their capital. If you decide you want to be a short-term or swing trader, be willing to invest the time because you will really have to sharpen your technical skills before being able to beat passive investors, but it most certainly is possible. Also nobody talks about the time involved when trading short-term. Passive investors are using that time to make money in other areas or researching other companies. What’s that time worth to passive investors, another 2%, 3%, 5% annually? These are only questions you can answer… Personally, I like to combine both but I always try to veer towards being long-term and fundamentals. Invariably, this means that the income from my short-term investments varies a lot every month, as I give precedence to my long-term goals.