The stock-investing concept of buying and holding stocks for the long-term is the most well-known strategy. Amateur investors and people with no stocks have heard this strategy and many people starting out want to use this one promoted by financial advisers.
There is a single key component to this strategy that is so important that it makes everything else about this strategy irrelevant in terms of leading to a successful investment. This component is the concept of value. When you are purchasing stocks, are stock values relatively cheap or relatively expensive?
Whether you are investing in stocks, real estate, rare collectibles, or other investments, your investments results will be poorer if you are investing at relatively high prices or better if you are investing at relatively low prices. Although this appears to be self-evident, the difficulty is determining which metrics to use in evaluating whether stocks are relatively high or low.
Some metrics that investors use are ratios that they visually examine for their historical ranges. For example, stock price-to-earnings chart, stock price-to-sales chart, stocks-to-gold, stocks-to-oil, and stock price-to-book value. Reviewing these types of charts will highlight whether your potential purchase or sale of stocks is occurring at a relative bad time or relatively better time.
To emphasize how important it is to understand underlying stock values, and to only purchase when they are relatively low, below are some recent stock market realities that you should know:
- The Japanese stock market is still lower today than it was 27 years ago in 1987.
- The Russian stock market is lower today than it was 8 years ago in 2006.
- The Italian stock market fell in 2008 by 71% and has yet to recover, 6 years later.
- The U.S. had a flash-crash of 9% during a single day in 2010.
- The U.S. stock market fell by 55% during 3 months in 2008.
- The U.S. stock market only recently made a new high from 14 years ago in 2000.
In order for Buy & Hold stock market investing to be a viable strategy for your portfolio, an effort toward evaluating whether the stock market is relatively cheap or expensive must be an ongoing evaluation.