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Historically, a large number of blue chip stocks have been shown to appreciate over time. Investors, like the Oracle of Omaha, Warren Buffett, buy quality companies when they feel they are valuable and hold them for the long haul.
It’s a strategy that works. Even though some holdings may never appreciate in a big way, on average, major market indexes have shown positive returns if held for at least 10 years.
But like any investing strategy, there are several flaws in this investment technique. The first is time. Many of us do not have the patience for or the luxury of “waiting it out.” Some investors throw in the towel before their stocks finally return to profitability, and obviously there are some stocks that never reach profitability.
The other issue is stop-loss orders. By placing an order in which your position will automatically be sold if it falls to a specified price, you might get kicked out of an investment early and end your attempt to stick with your buy-and-hold strategy.
Then again, if you hold and forgo implementing a stop-loss, the thought of potentially losing more than 30%, 40% or even 50% of your investment capital tied to a stock will have effects not only on your wallet, but also on your psyche.
In reality, it all comes down to timing and tolerance.
Just think if you were lucky enough to start investing during those first few years of our latest bull market. A few years ago investment manager Ed Easterling of Crestmont Research produced a slew of profound research that echoes what I have been saying for years: Buying and holding a basket of stocks isn’t enough by itself. You must use alternative investments to outperform the market over the long term. But I’ll get to that later.
Based on his research, Easterling created a compelling infographic to visually present the data. His detailed chart shows annualized returns in the S&P 500 index based on thousands of possible combinations of market entries and exits. You must check it out.
Yes, investors are at the mercy of the market gods when it comes to long-term investing, but that doesn’t mean that we should avoid a buy-and-hold strategy.
Take a look at the following chart of the S&P 500’s performance from 1995 to mid-2015:
As you can easily see, there are periods of extreme growth, like what we see from 1995 to 2000, 2003 to 2007 and again from early 2009 to now. But what about those investors who bought in 2000 and waited until 2009 to sell?
That being said, it is fairly safe to say that if you bought the SPDR S&P 500 ETF (NYSEArca: SPY) and held it for 10 years, you would have some sort of profit in your account. So the real question is not only how much profit you’ve made by holding for at least 10 years, but also the amount of anxiety you may have had to endure to reach some sort of profit.
This is why investing in stocks for the long haul can be frustrating for many of us. We know it’s a sound strategy, particularly when used with blue chip stocks, but that doesn’t hide the fact that long-term investing can be difficult and frustrating. Plus, it’s hard for investors to comprehend investing for long periods of time, especially during periods of market turmoil.
Think about how many aspects of your life will change over the next 10 years – your career, likes and dislikes, musical tastes, possessions and more. The average individual stays in a house for roughly seven years, but we are expected to hold a stock for at least 10 years or more? Again, while holding for the long haul is proven to be positive for your investment account, we can’t hide the fact that it is still difficult to endure periods of decline.
But there are simple ways to combat periods of decline, and moreover, to enhance returns during the good times.
Options allow us to precisely set up time horizons, reduce risk and make investments with significantly better odds than stocks. Although that’s not to say the two investing strategies are mutually exclusive.
In my High Yield Trader service I use several different options strategies on blue chip stocks like General Electric (NYSE: GE), Microsoft (NASDAQ: MSFT), Altria (NYSE: MO), Intel (NASDAQ: INTC) and more to enhance returns.
Our founder, Ian Wyatt, likes to refer to the process as doubling the dividend, even though we have made over 10 times the dividend in over 70% of the stocks we own in the High Yield Trader portfolio. Moreover, since its inception, the portfolio has outperformed the S&P 500 through the use of two basic strategies: selling puts and covered calls.
If you would like to learn more about how I use simple options strategies to enhance returns on stocks you most likely already own, please click here.