We’re having all sorts of fun in the Team Phoenix Discord channel, and I wanted to elaborate on my answer to one of the questions I received from my pal Mohammed.
The gist of it was this:
“When is a good time to add stocks to my long-term portfolio, and what is your suggested strategy?”
Mohammed used JPMorgan Chase (JPM) as an example, but you could substitute any high-quality blue-chip stock or ETF that you want.
Let’s start with two key points:
First, I’m assuming our hold time is at least five years and could be decades. That is my definition of long-term.
Second, it’s always safest to invest in a diversified basket of stocks via SPY, DIA, QQQ, IWM, or something similar. I have more confidence that the market recovers in aggregate than that every individual stock does.
Tick Tock
Here are three truths about investing in the stock market.
- First, the sooner someone invests, the more money they inevitably make.
- Two, the longer an investor’s hold time, the more likely they are to make money.
- Three, the longer an investor’s time horizon, the less their entry point matters.
Let’s take a closer look at each.
Suppose I buy stocks now, and you buy one year later. Do you know what the odds are that you’ll get a better price? Roughly 25%. That’s because the stock market has historically risen 3 out of every 4 years. I don’t know about you, but those are poor odds.
Here’s a potential rebuttal. “But, what if a huge crash occurs over the next year. Won’t I get a way better price, thus, making it worth waiting?”
Answer: yes. So tell me what your track record is with predicting the past large crashes. And even if you are somehow consistently forecasting the years that meteors hit the market, have you had the intestinal fortitude to buy during the fire sale when the trend looked terrible, and fear gripped the Streets?
I doubt it.
Here’s the key takeaway: The best time to buy in a long-term portfolio is NOW.
Long-Term = Higher Probability
The second two points go together. I’ve referenced the following graphic before, but it bears repeating.
It shows the percentage of the time you would have made money investing in the market over various holding periods. The trend is clear. The longer your hold time, the higher the likelihood that you’ll score a profit.
Whether prices rise or fall over the next few days, weeks, months shouldn’t matter to someone planning on holding for the long run. For true believers in the power of equity investing, dodging the next 20% drop doesn’t matter near as much as not missing out on the next +100% gain. Remember the tried and true statement by legendary investor Peter Lynch:
Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.
The reason people ask about the best time to buy is because they don’t want to purchase right before a bear market. But if you genuinely believe the downturn is temporary, why spend so much time and energy trying to sidestep it? They never arrive on schedule and often end as quickly as they began.
Now, for the second of Mohammed’s questions.
What is Your Suggested Strategy?
Let’s consider the various options for buying stocks for your long-term portfolio. Suppose, again, you’re sitting on a lump sum of $10k and want to put it in the S&P 500 or another high-quality stock.
- Buy all at once.
- Buy in increments.
- Sell puts to get assigned at lower prices.
- Buy stock and immediately sell covered calls
- Buy stock with protective puts
I’m a fan of every one of these approaches. My suggested strategy is the one you can live with. There’s no sense in buying all at once if you’re uncomfortable sitting through a 15% decline. Then again, if you’re unwilling to sit through multiple double-digit percentage declines, then I haven’t a clue as to why you’re investing in stocks in the first place.
If scaling-in or dollar-cost averaging better fits your temperament, then do it. If you need to couple your stock purchase with protective puts, well, that’s better than not investing at all!
In short, every one of these ideas is fine. They simply involve different tradeoffs. Buying all at once offers the most profit potential but the most risk. Selling puts involve much less risk, but much less reward too.
If you’re wondering what I do, the answer is “everything.” At one time or another, I’ve done every strategy mentioned.
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