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Profiting From Long-Term Investing

Profiting from long-term investing is possible because investor behavior is often based on fear. Fear is normal but causes us to sell low and buy high. If we can side-step our fears and take risk into consideration then we can profit from this kind of investing.

When it comes to the securities markets some prefer to buy individual stock funds while others invest in the market long-term. The day traders buy and sell stocks based on their specific algorithm while the buy-and-hold investors put their money into a stock index fund or an ETF (exchange-traded fund).

I’m an investor. My investments grew – appreciated in value – from $770,000 to $855,000 from July 2017 through July 2018. This $85,000 growth in my net worth came from my investment returns. Specifically, my index funds.

The most important things I needed to figure out for myself were:

  • What’s my risk tolerance? High.
  • Which kind of investment do I want to master? Funds which follow an index.
  • When will I need access to those investments? A long time from now.

Long-Term Investing

What I mean by long-term investing is buying a fund and holdin on to it long-term. You stick with that particular investment product through its ups and downs. Your goal isn’t to sell it when it is at an all-time high. You certainly won’t sell it when it hits an all-time low.

Your profits come from somewhere in the middle. You weather the wild swings because you believe that the index you chose will in the long-term outperform the average of the market. I have used VTI as an example in the past – a broad US stock market ETF.

I used the words “you believe” because that’s all investing is; our own assumptions about how a particular investment vehicle will perform. I believe that passive index funds will do well in the long-term. I am therefore comfortable investing in index funds (VTSAX) or equivalent ETF’s (VTI).

I am very comfortable with being wrong. I learned a long time ago that I’m in far less control of my life than I like to believe. I have to choose to do something with my money. Earning money, in fact, automatically makes you an investor. If you hold your money in cash then you are investing in the liquidity of your money, perhaps using it to buy experiences or entertainment.

If you hold your money in a checking account then you are investing in fix assets, probably believing that the stock market will likely lose. Maybe you put the majority of your money into your home or other physical real estate, banking on the longevity of such investments. Every monetary decision automatically becomes an investment.

Profiting from Long-term Investing

The graph below is a screenshot of the VTI exchange-traded fund which tanked in December of 2019. It went from a high of $150 per unit down to $120. Over the next 3 months it recovered back to a value of $145.

Take a look at the grassy spikes on the bottom of that screenshot. Red are trading volumes where investors sold the fund and the green spikes represent when investors purchased the fund.

Late October 2019 when the fund started drifting downward investors assumed that a market crash is coming. Or they panicked for other reasons, maybe regretted getting into VTI in the first place. They started selling out – very few were purchasing the fund.

When the fund started dropping precipitously the trading volumes surged and many were selling off; selling out at the bottom of the market. These investors locked in hefty losses which in turn further drove down the cost and value of the fund.

Some may have regretted their decision and got back in later when the fund went from $120 to $125. More got in when it started getting into the $130 range. Maybe because new investors were intrigued by VTI or because old investors felt that it was once again safe to hold this ETF.

Frantic Sell-offs

The frantic sell-offs further drove down the value of the fund, a common phenomenon in trading. All the while I was still investing into this fund. It’s not that I bought more when the fund was tanking – I was just buying the fund regularly, every week in fact.

I was buying the fund when it went from $150 to $145. I was buying it when it went down to $140, $130, $125, and $120. Then I kept buying the fund when it was rising from $120 to $125, $130, $140, and I’m still buying it at $145.

My investing is automated. Every week a purchase order is executed at Vanguard. Money is taken out of my bank’s checking account and a certain dollar amount of index funds is purchased.

More Funds for Less Money

Because I invest a set dollar amount every week I get to buy more individual funds each time I execute a trade. If I buy $500 worth of VTI every single week then I buy more shares of it when the price is down to $120 than when it’s up at $145.

I believe VTI to be a good investment at $150, $160, even $200. In the long-run I am banking on this fund to keep going up. So I keep buying and buying as long as I have disposable income to invest with.

Over my decades of investing I will buy this fund when it peaks but I’ll also get a chance to buy more shares when it dips. At $150 I can by 3.33 shares. But at $120 I get to buy 4.17 shares for that same $500 weekly investment. More shares means more profits.

Investor Behavior

The reason I threw up that graph is to demonstrate investor behavior. There were many sell-offs when that fund started tanking. It’s exactly that kind of investor mentality which makes long-term investing profitable for someone who has a long position.

I am banking on the 3,000+ companies within VTI to perform well; some of my profits from the fund will come from such added value. I’m also banking on my competition to panic and sell. To lock in a loss and buy high and sell low.

Part of it is having a healthy risk profile and another part is patience. A big part is experience and practice. The more we invest the better we get. I don’t know anything about short-term investing, day-trading, I certainly don’t have the time for it. But long-term investing will remain profitable for me for the foreseeable future.

The Next Recession

The fear of the next recession sets in as soon as recovery begins from the previous recession. Circa 2010 quite a few of my investment buddies cashed out and believed that the stock market is rigged at worst or broken at best.

Another cohort took their money out somewhere from 2012-2014 because the market appeared excessively healthy. They believe the next recession was right around the corner. In fact, the next recession hasn’t yet taken place. We’ve seen some of the highest stock market gains from 2014 until present.

But the next recession will come. For the investor who needs access to all of the value of their stock portfolio it’s not wise to remain invested in the stock market. The money that’s needed to live off of should be transferred to something more stable such as a CD or a bond fund.

Since I don’t intend to spend my investments in the near future I don’t have a problem riding out the next recession. Because after a stock market bust there is often a sexy market boom. And this cycle will repeat. Or so we are told.

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