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A long term investor is usually defined as someone who enters an investment for, say, 10, 20, 30 years or more. Generally they buy an investment to help meet a certain objective in their lives (e.g. retirement) and keep it until they reach that objective.

So why when it comes to investing in such assets as stocks or indexes or ETFs are some of these long term investors so concerned on their entry price?

I know of investors who have waited and watched the market to get 1% or less off the current traded price to buy in (and they won't buy it if it goes higher up, willing to instead forgo the investment if the price does not come back down). But once they have bought it (if able to get it a the lower price) they are willing to let it fall another 5%, 10%, 20% or more with the justification that they are in it for the long term.

Why is so much effort made to get a small percentage off an investment, if one is then willing to let the investment drop another 20% or more with the reason of being in it for the long term?

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It has got to do with the irrationality of humans.

The so called long term investor is in it for the long term, they are not worried about market fluctuations nor timing the market. But yet they will aim to try to get a bargain when they buy in.

It is contradictory in a way. Think about it; if I buy a stock and it drops by 30% I am not worried because I am in it for the long term, but I am worried about getting 1% off when I buy it.

They usually tend to buy when the stock starts falling. However, what they don’t realise is when a stock starts falling there is no telling when it will stop. So even if they get a bargain for that day, it is usually quickly wiped out a few days later. Instead, of waiting for the price to find support and start recovering, they are eager to buy what they think is a bargain.

I think this type of long term investing is very risky, and the main reason is because the investor has no plan. They just try to buy so called bargain stocks and hold them until they need the money (usually in retirement). But what happens if the stock price is lower when they want to retire than when they bought it? I hope no long term investor was trying to retire in 2008. If they simply had a plan to indicate when they would buy and under what conditions they would sell, and have a risk management plan in place, then maybe they could reduce their risk somewhat and conserve their capital.

A good article to read on this is What's Wrong With Long-Term Investing.

  • In my opinion this boils down to the question: "How many % gains I'm like to achieve in x year?" Buying at discount increases the likelihood of achieving the % gains as well as reducing the waiting time-frame. Why'd this matter to long term investor? Because it allows them to re-balance their portfolio to lock down the gains: "OK x stock price has raised y%, I'm selling them off to buy the other good stocks/bonds at discount." Well as you said it's certainly bad if the investors only rely on the entry price as the metric of good investment -- without accessing the company at all. – ASF Apr 27 '13 at 15:24
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    @ASF- any good company today can be a bad company tomorrow. If you don't have a risk management strategy you have no way to manage this. You are be willing to sell a stock that has increased by y% when it could rise another y% and buy another stock at a so called discount when it could still be falling by another z%. Why would you not let your profits run and keep your losses small. A simple risk management strategy of placing trailing stop losses on all your stocks. Read up on money management, position sizing and stop losses to learn more (vantharp.com/tharp-concepts.asp#Sizing). – Victor Apr 27 '13 at 21:19
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    I don't, hence I stick to index fund for the most. I may sell off those good stocks that are overpriced partially for re-balancing purpose. – ASF Apr 29 '13 at 0:43
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    @ASF - And how do you know a good stock is overpriced or under-priced? – Victor Apr 29 '13 at 6:26
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    @RicardoAltamirano - no I don't know how to analyse a company to the bone like Warren Buffet and I certainly never said I did, that is why I employ a risk management strategy, I let my profits run when a stock continues to go up, and I get out when it starts falling (through automatic stop losses). And I never ever buy a stock when if is falling (because you never know when it will stop falling). These are the basic principles I stick to. So Ricardo you know nothing !!! – Victor May 14 '13 at 13:46
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This is not hypothetical, this is an accurate story.

I am a long-term investor. I have a bunch of money that I'd like to invest and I plan on spreading it out over five or six mutual funds and ETFs, roughly according to the Canadian Couch Potato model portfolio (that is, passive mutual funds and ETFs rather than specific stocks).

I am concerned that if I invest the full amount and the stock market crashes 30% next month, I will have paid more than I had to. As I am investing for the long term, I expect to more than regain my investment, but I still wouldn't be thrilled with paying 30% more than I had to.

Instead, I am investing my money in three stages. I invested the first third earlier this month. I'll invest the next third in a few months, and the final third a few months after that.

If the stock market climbs, as I expect is more likely the case, I will have lost out on some potential upside. However, if the stock market crashes next month, I will end up paying a lower average cost as two of my three purchases will occur after the crash.

On average, as a long-term investor, I expect the stock market to go up. In the short term, I expect much more fluctuation. Statistically speaking, I'd do better to invest all the money at once as most of the time, the trend is upward. However, I am willing to trade some potential upside for a somewhat reduced risk of downside over the course of the next few months.

If we were talking a price difference of 1% as mentioned in the question, I wouldn't care. I expect to see average annual returns far above this. But stock market crashes can cause the loss of 20 to 30% or more, and those are numbers I care about. I'd much rather buy in at 30% less than the current price, after all.

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    By buying a mutual fund or ETF you are averaging out your returns, where the bad assets bring down the returns of the good assets. But as a long-term investor what is your purpose for investing? Is it to build your funds for retirement? What happens if the market is going through a crash during the time you were looking to retire or get access to your funds? – Victor Apr 26 '13 at 21:58
  • Yes, the bad assets bring down the returns of the good assets, but I'm not reliably capable of predicting which is which. I'm comfortable receiving returns of approximately the stock market rather than trying to beat the market. I don't believe that's an effective use of my time, though it may well be for you. As I get closer to retirement, I will move money out of stock mutual funds and ETFs and into bonds and other, safer but lower return products. – ChrisInEdmonton Apr 27 '13 at 1:05
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    Fare enough Chrisln, at least you have some sort of strategy, but many others don't (and that goes for long term investors and shorter term traders). – Victor Apr 27 '13 at 10:32
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Because buying at discount provides a considerable safety of margin -- it increases the likelihood of profiting. The margin serves to cushion future adverse price movement.

Why is so much effort made to get a small percentage off an investment, if one is then willing to let the investment drop another 20% or more with the reason of being in it for the long term?

Nobody can predict the stock price. Now if a long term investor happens to buy some stocks and the market crashes the next day, he could afford to wait for the stock prices to bounce back. Why should he sells immediately to incur a definite loss, should he has confidence in the underlying companies to recover eventually?

One can choose to buy wisely, but the market fluctuation is out of his/her control. Wouldn't you agree that he/she should spend much efforts on something that can be controlled?

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    "...he could afford to wait for the stock prices to bounce back." What happens if the stock doesn't bounce back and it crashes to zero? – Victor Apr 26 '13 at 10:32
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    @Victor In finance, that's known as risk, and it's very possible to hedge against it when investing. – Ricardo Altamirano Apr 26 '13 at 11:27
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    @RicardoAltamirano, my point exactly, a lot of people who buy and hold for the long term usually have no risk management in place. – Victor Apr 26 '13 at 11:29
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    @RicardoAltamirano, hedging can be a part of a risk management strategy (risk management can be different for different people), which every investor and trader should have in place before starting any investing or trading. The problem is most buy and hold investors and traders don't have any risk management in place at all. – Victor Apr 26 '13 at 11:59
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    @ASF - any large good company with good financial records in the past year can be a bad company tomorrow. things can change very quickly. Proof of that was seen in the GFC. Investing in an index fund is not really risk management, it is averaging down the good stocks with the bad ones to achieve close to market returns. So if the market falls by 40% so will your returns. – Victor Apr 27 '13 at 10:41
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  1. I'm not sure who specifically you are talking about. Those are some pretty broad generalizations. Where do you draw the line about what is too much concern about entry price? On what basis do you make the assertion that they are overly concerned with it?

  2. For those that do: Probably because when you are buying anything, a lower price is preferable in general. Why WOULDN'T you want to get the best deal possible?

  3. I think you are making assumptions (about whom I don't know) that people always invest based on cold hard logic. This is not often the case.

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    I am referring to people who claim to be long term investors, some are friends of mine, others I have met at investment clubs and seminars, and others I have read about on this site and other sites. They all seem to have the same intentions I referred to in the question. – user9722 Apr 25 '13 at 23:04
  • I don't know those people. So I can't really speak to their motivations. – JohnFx Apr 29 '13 at 1:47
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    Regarding point 2, because you are not shopping at a market stall. Falling stocks will generally keep falling lower. So what might look like the best deal today may look very expensive tomorrow. – user9722 May 14 '13 at 13:58
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If you think of it in terms of trying to get an annual return on your investment over the long haul, you can do a simple net present value analysis to decide your buy price. If you're playing conservative with the investments and taking safety over returns, you will still have some kind of expectation of that return will be. Paying slightly more will drag down your returns, perhaps less than what you want to get. If you really want to get your desired X%, then stick to your guns and don't go down the slippery slope of reaching. If 1% off isn't bad, then 2% off isn't all that bad, and maybe 3% is OK too for the right situation, etc. Gotta have rules and stick to them. You never know what opportunities will be around tomorrow. The possible drops in value should be built into your return expectations.

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