Why You Need To Hold Your Stocks Long Term!

Posted in   Stocks   on  August 21, 2023 by  Money Bren0

Nothing in this article is financial advice. The writer is not your financial advisor. Investing contains risk and you can lose money. Consult your own professionals before making investment decisions. This article may contain affiliate links. 

One of the concepts that took me a long term to wrap my head around was the buying and holding of stocks.

I was a teenager when I first got into stocks, and the idea of just holding stocks forever didn’t make sense to me.

If you do that, how do you make any money?

Stocks that didn’t pay a dividend especially didn’t make sense.

If you can’t sell them, and you don’t receive a dividend payment, what do you do?

Just sit and wait …. forever?

Turns out the answer is – yes.

That’s exactly what you do.

And once I understood that – I made more money than I thought possible.

The secret – thinking long term

The reason, especially as a teenager, that “buy-and-hold” is hard to make sense of is because we think of making money as “making cash”.

If I make $1,000, I want to see that $1,000 in my bank account, or in my hand as a wad of cash that I can spend.

Instead, you should be thinking of “making money” as “making wealth”.

And how do you create wealth?

Do you create it by keeping your money in your hand as a wad of cash?

Or do you create it by investing that money in assets like businesses or real estate?

To do this successfully – you need to think long-term.

You need to change your mindset from, “If I buy this stock for $1 and sell at $2, I will double my money” to “If I invest $1,000 in this business for 50 years, it could grow to $1 million.”

Short-term thinking loses in the long run

Here’s how most people think about stocks.

You have $1,000 to invest.

You buy a stock for $1.

It goes up to $2.

You sell it and double your money.

Then a few months later, you invest in the same stock at a share price of $4. It goes up to $5.

You sell it again, for another 25% gain!

A year later, you see it rallying again.

You buy it at a price of $10, and sell it for $15.

Another 50% gain!

At this point, you’re pretty happy with yourself.

You’ve turned your $1,000 into $3,750.

Not bad!

But here’s what has actually happened.

A stock that you were invested in has gone up from $1 to $15.

Yet you only enjoyed the gains from $1 to $2, $4 to $5, and $10 to $15.

That’s not even half the gains.

Had you simply left your $1,000 in at $1, you would now have $15,000.

Instead, you have $3,750.

Now imagine if this weren’t just a $1,000 one-off investment.

Imagine if it were $1,000 invested every month for 50 or 60 years.

You would literally lose out on tens of millions of dollars.

As soon as you sell, your growth stops!

Ponder this:

Say you buy a house for $500k.

After 3 years, it’s gone up to $600k.

Wow – $100k gain!

You decide to cash out and sell.

Assume after paying the mortgage, legal bills etc, you made a gain of $50k.

Good result?

Sure.

But here’s the million dollar question.

What will you do with that $50k now?

Unless you find somewhere to reinvest it, you’ve essentially stopped growing.

So what most people do is take that $50k, get another loan, and buy another property.

If that’s the case – why even bother selling in the first place?

You could have just held onto the house, and in a few more years, it would grow from $600k to $700k. And then $800k to $900k. And then $900k to a million.

All you’ve done is temporarily stopped your wealth from growing (and created a lot of extra work for yourself!)

Stocks work in exactly the same way.

If you sell your stocks, you can’t sit on that cash if you want to grow wealth.

You need to find somewhere to reinvest it.

So why not just leave it invested in the first place?!

Remember what the goal is

What are we trying to achieve by saving and investing?

Are we trying to make an extra $1,000 to buy a cool phone?

Or are we trying to create early retirement and financial freedom?

Generational wealth?

An abundance of assets to hand down to our grandchildren?

The fact that you “can’t” sell your stocks, or don’t get a dividend, isn’t a downside.

It’s an advantage.

It means more of your wealth remains invested in businesses, compounding year-on-year to grow your wealth faster.

In fact, I now actively favour stocks that don’t pay dividends, because I don’t want to need to think about where to reinvest that cash. I prefer the company keeps that cash and finds somewhere to invest it for me.

The reality is – when you’re growing your wealth, your investments aren’t supposed to provide you an income.

Even the dividends are just bonuses; the best possible thing you can do with them is reinvest them into more stock.

The money you require for daily living should come from other cash-flow sources, such as your job and your side hustles.

By leaving your money invested in companies that are constantly growing and reinvesting into more growth, your money will compound into a small fortune over time.

This is why buy-and-hold is so effective.

Over time, the creation of wealth is almost guaranteed.

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