Building an Investing Cushion

People who are invested in the stock market are enjoying one of the longest periods of sustained growth in its history.  Following the recession of the late 2008-09, the U.S. markets in particular have moved steadily upward, having only short periods of minor setback and few at that.  It’s really quite an amazing run when compared to the overall history of the market.

Even if an investor has started buying stocks of quality companies only within the last five years and held onto them, they will typically have already experienced some of them at least tripling in value even if they only own a dozen companies.  This is the most obvious benefit of long-term, buy-and-hold investing, but another big benefit is not as obvious:  the longer you hold onto a successful stock, the larger the ‘cushion’ that develops between the stock’s current price and the price you bought it at.

Suppose you have a stock that’s tripled in value.  This represents a 200% increase in value.  During the last recession of 2008-09, the typical stock of a quality company took a hit of around 30% and this was the most severe market correction since the Crash of 1929.  Even if the next crash or recession (which will happen again at some point) sees a stock that has tripled in value lose half of its value, you’re still way ahead of the game.  Say you bought the stock at $30 per share and it has increased to $90 before the correction and then to $45 at its worst point, you’re still up 50% above your original investment!  The cushion built by the increase in the price of the stock has protected your original investment even during the worst of market corrections.

Note that the stock of a quality company will reach a low point below which it becomes ridiculously cheap.  At that point, the “smart money” investors will begin to dump money back into the stock, practically laughing their way to the bank, because they know that you can’t keep a good company down for long.  Especially if it provides an essential product and/or service, it will keep ticking along no matter what the economy is doing.  It still keeps its doors open and its employees still get things done.  Others investors will follow along and within a couple of years – sometimes much sooner – that stock will rebound and be above the price it was at before the correction.

Again, this cushion cannot possibly be built if you’re in the habit of being skittish and jumping in and out of stocks, having a short-term mindset of less than three to five years.  You simply will not have allowed the power of time to do its work of building a sizable cushion if you’re bailing out after a stock gains only 20%, for example.  In that case, a big correction will likely send the value of your investment into negative territory and what I’ve learned about most investors is that a big correction scares them into selling once they’re in negative territory instead of waiting it out, hard as it is to do during those times when everyone is screaming for you to sell instead of hold on or buy stocks at deeply discounted prices.

Although nobody can predict the future, the long-term trend of the stock market is steadily upward even with all of the worst political and economic events taken into consideration.  One can confirm this by doing the research.  Therefore, even though the market seems ‘hot’ right now, there is never a bad time to start buying shares in the stock of quality companies.  And of course, the more time you have for the prices of those stocks to rise, the bigger your financial cushion and therefore the less likely chance that your holdings will ever dip below the price you bought them at.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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