Everyone says there’s no such thing as a free lunch, especially when you invest in the stock market. But there is one almost guaranteed way to make sure you never make a loss – as long as you’re willing to be very hands-off.
💰 What’s the opportunity here?
If you’ve been in the investing game long enough, you’ll know that stocks can go down a lot.
In fact, buy-and-hold investors of US shares would’ve had to stomach losses of more than 40% five times in the past century – including 80% in the Great Recession of 1929. Take a look…
Source: Robert Shiller Database, Finimize
But stocks’ riskiness is also their silver lining: they go up in the long term precisely because investors can lose a lot of money in the short term. That makes sense: no one would invest in something risky if they could make the same returns with something safe, like depositing money at the bank.
Investors are profit-driven and need to be compensated for taking risks, in the same way a casino needs to be compensated for the risk of having to make a big payout. Over one game, the odds are only slightly tilted in favour of the casino (known as the “house edge”). But played multiple times, the casino will almost be guaranteed to make a profit…
📉 How does this work?
Here’s the thing: the longer your investment horizon, the less likely you are to end up with a loss.
In fact, the probability of losing money decreases quite spectacularly with time. Invest in stocks for a day, and the probability you lose isn’t much less than the probability of losing a coin toss. Invest for a month and those 50/50 odds decrease to about 40%. If you held US stocks for 10 years, you’d have historically ended up with a loss only 10% of the time. And if you held for 18 years, you’d never have ended up with a loss.
The probability of a loss decreases as the time horizon increases
The opportunity here is pretty clear: buy stocks today, go to sleep, and wake up in 20 years, with the near certainty of having made money while you slept. You might even have earned back that compensation for holding risky stocks – which has historically been 6.6% per annum (adjusting for inflation) over the past 121 years.
Variability of outcomes decrease as time horizon increases. Source: Credit-Suisse
⚾️ Is there a catch?
At a minimum, there are three important facts you should know:
The probability of a loss is minimized. Magnitude isn’t.
Hold stocks for a few months and you’d have to be pretty unlucky to experience a 50% loss. But hold it for 50 years and it becomes a near certainty. And when that happens, it’s hard not to do something hasty – like selling at the bottom and turning those paper losses into a reality.
This isn’t just long-term investing: this is very long-term investing
You have to hold stocks for more than 12 years to really reduce the probability of making a loss – and 12 years is a really long time in such a fast-paced world. Even in a 10-year period – which most of us would already consider long term – you’re not guaranteed to make a profit. And what’s more, the difference between success and failure is pretty significant. In other words, the return you’ll make over anything less than the very long-term is still highly uncertain. It depends on many other factors too, including things like starting valuations (which don’t look very promising right now). So unless you hold stocks for the next 20 to 80 years, it’s unlikely you’ll experience the typical 6.6% “average return” stocks have delivered historically.
The future and the past might be different
There are two reasons you’re warned against using the past to predict the future. First, non-overlapping data – which is required to reach a statistically significant conclusion – is quite limited. If you’re assessing a 20-year period, for example, there are only five to look at in the last century.
Second, investors can fall victim to “survivorship bias”, which is the tendency to use current winners as a representative sample. For instance, today’s largest and most liquid stock market is in the US, which is also the country with the longest dataset. It’s no coincidence that it’s also been the top performing economy over the period, and by quite a high margin. Other regions – Japan, say – look less promising, and show you’d have needed to hold stocks for more than 50 years to avoid a loss.
So yes, you can reduce the probability of loss by holding stocks for the very long-term. But it won’t be an easy ride, as you’ll have to stomach scary market crashes and bear markets that can last years. And even if you do manage to hold, there’s no guarantee you’ll achieve that long-term 6.6% return we’ve seen historically. Still, if you’re aware of the caveats and you’re a hands-off kind of investor, this could be right up your street.
FAQs
You have to hold stocks for more than 12 years to really reduce the probability of making a loss – and 12 years is a really long time in such a fast-paced world. Even in a 10-year period – which most of us would already consider long term – you're not guaranteed to make a profit.
How long should I hold a stock to make profit? ›
If your stock gains more than 20% from the ideal buy point within three weeks of a proper breakout, hold it for at least eight weeks. (The week of the breakout counts as week 1.) If a stock has the power to jump more than 20% so quickly out of a proper chart pattern, it could have what it takes to become a huge winner.
How long does it take to make profit on stocks? ›
When you invest in the stock market, it may take you at least a year to make money if you pick a solid blue-chip stock. This is essentially a stock of a large-cap company that rides market volatility, then earns you good rewards.
What is the 3 5 7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the 20 percent rule in stocks? ›
Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position.
What is the stock 7% rule? ›
However, if the stock falls 7% or more below the entry, it triggers the 7% sell rule. It is time to exit the position before it does further damage. That way, investors can still be in the game for future opportunities by preserving capital. The deeper a stock falls, the harder it is to get back to break-even.
How long should you realistically hold stocks? ›
The big money tends to be made in the first year or two. In most cases, profits should be taken when a stock rises 20% to 25% past a proper buy point. Then there are times to hold out longer, like when a stock jumps more than 20% from a breakout point in three weeks or less.
How much money do I need to invest to make $1000 a month? ›
Reinvest Your Payments
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
How much stock to make $1,000 a month? ›
To have a perfect portfolio to generate $1000/month in dividends, one should have at least 30 stocks in at least 10 different sectors. No stock should not be more than 3.33% of your portfolio. If each stock generates around $400 in dividend income per year, 30 of each will generate $12,000 a year or $1000/month.
How long should you own a stock before selling? ›
There's no minimum amount of time when an investor needs to hold on to stock. But, investments that are sold at a gain are taxed at a capital gains tax rate. This rate changes, depending on whether the investor held onto the stock for more or less than one year.
The 80% Rule is a Market Profile concept and strategy. If the market opens (or moves outside of the value area ) and then moves back into the value area for two consecutive 30-min-bars, then the 80% rule states that there is a high probability of completely filling the value area.
What is the 90 90 90 rule traders? ›
There's a saying in the industry that's fairly common, the '90-90-90 rule'. It goes along the lines, 90% of traders lose 90% of their money in the first 90 days. If you're reading this then you're probably in one of those 90's... Make no mistake, the entire industry is set up that way to achieve exactly that, 90-90-90.
What is 90% rule in trading? ›
The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.
What is the 80 20 20 rule investing? ›
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
What is the 1 rule in stock market? ›
The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn't mean you can only invest $100. It means you shouldn't lose more than $100 on a single trade.
What is the 8 week rule in stocks? ›
It's called the eight-week hold rule. If your stock produces a gain of 20% or more within three weeks of breaking out of a proper base, you may have a true winner on your hands. IBD research shows that in many cases, stocks that make this quick and powerful move are capable of doubling or tripling in price.
What is the 10 am rule in stock trading? ›
Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.
Do you make more money the longer you hold a stock? ›
Benefits Of Holding A Stock For Long Term
Long-term investments almost always give you more gains and profits and they outperform the market when the investors try and hold on to their investments and time them accordingly.
What is 3 day rule in stocks? ›
In short, the 3-day rule dictates that following a substantial drop in a stock's share price — typically high single digits or more in terms of percent change — investors should wait 3 days to buy.
