Investing

Long term holding

  • Last Updated:
  • Feb 14th, 2018 3:32 pm
Tags:
[OP]
Sr. Member
Mar 14, 2015
756 posts
57 upvotes
Edmonton

Long term holding

Read this recently and just wondered if it was the ideal situation for a long term holder?

If you hold on to something for years and years you'll get dividends or distributions that slowly add up but for the years that were really bulish, would it be better to lock in those gains and then buy back in so you actually earned something? If you don't sell on the gains and let it ride up and down then you never really gained something if that makes any sense.

Eg. $6000 unrealized gains and you don't sell, a year later its down to 1K so you never gained that potential 6K addition to your wealth and it's back down, would holding long term really negate these points moot?


"But the investor who has held a stock for years is never any better off than today's purchaser. This point is proved with a thought experiment. Pretend your broker made a mistake and sold your shares today, only to catch the mistake and reverse the transaction. You will not be aware of the transaction because your economic position has not changed. You would

own the same value of the stock
hold the same number of shares
receive the same value of dividend.

But now your cost is the same as the current market price - and your YOC is the same as the 'current yield'. If you never learn of the transaction you may continue to brag about that outsized YOC - your own personal delusion.

Too often you hear investors making very bad decisions based on this use of YOC. E.g when a company's prospects change and the stock should be sold, the long-term owner says "Oh, I can't sell my stock NOW. I'm earning a huge yield and I couldn't match that with anything else". He decides to not sell because his YOC will fall. "
9 replies
Deal Addict
User avatar
Aug 1, 2007
1425 posts
218 upvotes
The trouble is consistently finding the right time to sell. Most likely you would end up much worse off trying to time it.
Deal Addict
Jul 27, 2017
2180 posts
942 upvotes
If this is a time related question, then I suppose 10 years would be a benchmark if its about growth, yield & DRIP

OP, lets suppose you have a position(s) that you bought 10, 15, 25 years ago that pays dividends/distributions that over time you DRIP.

Each year you add to that same position, whether its stock/ETF/income trust unit/closed end fund ...

over time you see the fluctuations, yet there is growth as well as dividend/distribution increasing amounts.

Comes the time when you say 'eh, I need income from my investments'

Ignoring growth or decline of the position, suppose the yield is 5%/yr, why not take the dividend/distribution out each & every year?

Then a few years down the road from when you started to take out the dividends/distributions, you see the position has increased in value to a point that it makes it worth while to start taking out/selling off some of the positions for extra income 'money in your pocket' & pay capital gain?
Deal Guru
User avatar
Apr 4, 2001
11651 posts
507 upvotes
It's really depends what stock you're trading, which stocks you're moving to/from and what type of account you are investing in.

Examples:
  • If you were gambling on a particular stock with no sound reason for why you picked the stock, it makes sense to take gains if you have no reason to believe the price can be sustained.
  • Selling a stock to buy into another stock doesn't really do much in terms of locking in gains because a general market decline would affect both stocks, you've spent transaction feeds on the buy/sell, and in a non-registered account you've triggered a capital gain (which may or may not be good depending on your income situation). However, if you were selling to cash to wait for an anticipated market decline, or to move to a sector you believe would be less impacted by the factor you're concerned about then that makes some sense.
  • If it's something like a preferred share or bond ETF, you should weigh the future income stream against the capital gain/loss and the maturation date. Those tend to adjust up/down based on the interest environment, so you won't necessarily be better off selling to buy into another because the market tends to price in the relative up/downsides.
Most people are probably better off picking something like a diversified 60/40 equity/fixed income split and just riding with that, shifting the balance toward the right as you get older. If all of your investments are for retirement purposes then it makes sense to hold as many of the equities as possible in the TFSA as they are permanently tax-sheltered (unlike an RRSP which defers the tax until later in life - hopefully in a lower tax bracket, but this depends on a number of personal circumstances).
[OP]
Sr. Member
Mar 14, 2015
756 posts
57 upvotes
Edmonton
So in theory though, would holding through mitigate the "benefits" of selling when you have unrealized gains and buying in lower if this was an ideal world, would this be better or would holding throughout still negate this?
Sr. Member
User avatar
Oct 19, 2016
650 posts
205 upvotes
Toronto
Thats just simple math.. ofcourse if you can predict the market is going lower or higher.. obviously it would be better to time the market.

Say you are nostradamus, and you knew 100% the stock you own price would fall down tomorrow, would you keep holding or sell it today ?



FlyOverMyDoodle wrote: So in theory though, would holding through mitigate the "benefits" of selling when you have unrealized gains and buying in lower if this was an ideal world, would this be better or would holding throughout still negate this?
Deal Addict
Nov 9, 2013
4053 posts
3892 upvotes
Edmonton, AB
It's true you never know where the price is going to go and one bad day / week / month can wipe out years of gains (stairs up, elevator down as it goes). You can never predict when this happens, and over the very long term returns are always positive (although this can take up to 20 years, based on S&P 500 data -

The first best option is to trust that appreciating assets appreciate with time and ignore it. For myself, as a human, my brain and emotions won't let me do this so I have to devise ways to trick it into largely doing nothing and let time work for me.

One other thing to be mindful of is the Behavioural Gap - where your fear and emotions about losing money causes you to do things that lose money. This is largely why real investor returns lag their benchmark over time. Your long term approach should be something you believe in and something you can stick with, so when the bad times inevitably come you don't sell out of fear.

The way I do this is with dividends. I only really focus on price once (when I'm buying) and then after I've purchased I worry more about the health of the company and it's ability to pay dividend. If the company is healthy and the dividends are growing with time then I am happy. It actually benefits me to have depressed share prices while the dividends grow (an example most recently is ENB) as this means my DRIPing will lead to more compounding. So I should welcome, not be fearful, of reduced share prices.

Like share prices, dividends can also fall but assuming the company stays healthy this is far less common, especially if you focus on quality and a long dividend history (intuitively, dividends are sticky for behavioural reasons - once a corporation gets in the habit of doing something (like people) there is tremendous inertia to a change in behaviours. For a more academic explanation see The Lindy Effect).

Ultimately my view is that it's always possible to lose money and this will happen from time to time. However over the long haul my expectation is that I'll be up (which is confirmed by empirical evidence) so in essence I put my faith in the market and then use a strategy I believe in (focusing on dividends) to manage my behaviours and limit emotional / irrational behaviours.
Keep calm and go long
Newbie
Feb 12, 2018
3 posts
1 upvote
Kincardin
mrtrump wrote: Thats just simple math.. ofcourse if you can predict the market is going lower or higher.. obviously it would be better to time the market.

Say you are nostradamus, and you knew 100% the stock you own price would fall down tomorrow, would you keep holding or sell it today ?

I'm in agreement with mrtrump....there is hidden order in everything - if only people care to see
Newbie
Feb 12, 2018
3 posts
1 upvote
Kincardin
Hidden order... can be seen in large data (history) set compared to small individual items with less history. In addition, I will add that everything is connected interlinked and not just one factor. For this one needs super super computer to cross examine
Hidden Order
Deal Expert
User avatar
Apr 21, 2004
54662 posts
19455 upvotes
We are all long-term holders until such time our investments are above water / average cost. :)

Top