(I am on the road, so a shorter post this week.)
Investing with a holding period of decades is ideal for the retirement accounts of the average investor.
What are the challenges to being a super-long-term investor?
The primary problem is stock selection since we can only decide based on the here and now, without any idea of what the future will bring.
The second is the ability to absorb stock market volatility, which manifests itself as large declines (>-40%) in stock prices.
Third, the time to recovery to new highs is unknown. It could take as long as 10 years.
Would you be ready, willing, and able to hold an investment through a large drop that does not rebound for a very long time?
Take my case. I worked for GE right out of grad school and still own shares that I acquired in the mid-1980s. A look at the GE long-term chart is enough to give anyone vertigo. In split-adjusted terms, it peaked above $30 in 2000, and since then, its low was about $5. Surely, GE was a titan of the US industry, so what could go wrong if I held it forever?
The most quoted icon of super long-term investing is Warren Buffet. As Warren Buffet said in his 2019 letter to investors, he does not consider owning stocks as ... dalliances to be terminated because of downgrades by “the Street,” an earnings “miss,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”
More importantly, he warns: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps 50% magnitude or even greater. But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!
Clearly, he is saying be prepared to hold through a massive 50% or greater drawdown, but that is easier said than done, since as GE shows, the stock may not ever recover to new equity highs. In any case, this approach is a far cry from buying cryptocurrencies on margin.
Hence, instead of owning one or a few stocks, it may be easier for us mere mortals to own an ETF or mutual fund since, for every GE you own, there could be a Microsoft or Amazon to offset your pain.
Certainly, Buffet is not averse to concentrated bets, with most of his portfolio in three sectors: technology, financial services, and consumer staples. So, this insight can help you simplify your portfolio design.
A relatively simple way to implement his approach is to concentrate on owning the largest companies in the stock market (where the size is measured by market capitalization).
The many S&P-500 index funds are a safe place to start. But, there are other options.
There are several ETFs to help you own fewer mega-cap stocks for more concentrated portfolio weightings: for example, the XLG (Invesco S&P-500 Top 50 ETF) ETF or the OEF (iShares S&P 100 ETF), or MGK (Vanguard Mega Cap growth index).
ETFs will rebalance your portfolio to maintain index weights, which can affect returns.
If you want to hold the biggest stocks without ever re-balancing your portfolio, the Center for Research in Security Prices (crsp.org) has many indexes that you can browse through for inspiration. For example, you can see the constituents of the CRSP mega-cap index here for a list of the largest stocks.
Here is yet another example of how you could construct a Buffet-style portfolio with only two ETFs.
If you believe in the healing powers of the massive long-term trends in the US stock markets, then there is only one trailing stop you will ever need, the time stop: when you stop the clock on your investments, perhaps after retirement, or when the clock stops on you.
If you like to do your own research, my posts should give you a good starting point, with context and suggestions. You can visit my website, chandeindicators.com, for more information and ideas. I hope you will stay tuned and help by subscribing and recommending it to your friends and colleagues.
Thank you for spending some time with me.
And now for some housekeeping. This publication is for “edutainment,” education, information, and entertainment purposes only. It is not to be construed as investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.