In this Information Age, there are many distractions that can lead long-term investors to buy or sell stocks in a panic, which incurs taxes and commissions and lowers their overall returns. The three “don’ts” of investing listed below will help you get focused on the big picture and worry less about the short-term ups and downs of the market.
Don’t stare at the quotation screen
Twenty years ago you only knew your closing stock price for the previous day when you read your daily newspaper or phoned your broker to buy or sell shares. Now, thanks to the Internet, you can receive up-to-the-minute quotes on your shares, allowing you to fret all day long about every little price swing. This can provoke you to sell shares in a great company that could enhance your wealth over the long term.
For example, take the stock of fast-casual restaurant Chipotle Mexican Grill, Inc. (NYSE:CMG), which climbed to nearly $450 in the early part of 2012 before disappointing earnings sparked a nearly 39% drop in the stock price from July to October of 2012. Witnessing such a drop can lead to panic-selling, most likely at a loss compounded by stock brokerage commissions. However, over the past year Chipotle Mexican Grill, Inc. (NYSE:CMG)’s revenue and free cash flow have increased 12% and 51%, respectively, leading to a 24% return since the beginning of 2012. This underperforms the market, but the company is still in an expansion phase, and it plans to open 165 to 180 stores in 2013. Further, the growing popularity of healthful food will help drive the company’s top- and bottom-line growth. Long-term investors who sold out last year would have missed out on the rebound and any future gains that may await.
Don’t worry about daily headlines
Similar to watching stock quotes is watching the daily headlines. Headlines can also distract you from the big picture. The Dow Jones Industrial Average (INDEXDJX:.
Investors who panicked during the decline in August missed out on the market rebound occurring in September. Markets will wax and wane, but the key to weathering these storms lies in staying invested. Moving in and out costs you in terms of opportunity, taxes, and commissions.