It is every investor’s dream to invest early in a company such as Microsoft, Apple or Amazon. Oftentimes the media reports on how much we would have made had we invested early on. For instance, a $10,000 investment in Amazon at its IPO would be worth $4.9 million today (49,000% gain).
In order to achieve high returns, we must be willing to stomach large fluctuations in values and possibly lose money. This is the challenge. The market’s volatility ensures that we experience constant fluctuations and temporary losses. When losses accrue and forecasts become negative, getting to safety becomes our number one priority. We replace potential high growth assets with low-yielding, but more secure assets.
The Difficulty of Holding
Let’s assume you defy the odds and find the next Amazon. The issue is whether you are able to hold the stock for a long time – including through the severe downturns. After all, you don’t know whether you have a winner or a loser until well after the fact. Between 1999 - 2001 Amazon lost 95% of its value, and many thought it was going bankrupt. Apple was also dismissed by investors at one time. Unthinkable now!
If only Amazon and other growth assets would just go up in a straight line! The antagonist to growth assets is fluctuation. Fluctuations bring uncertainty and temporary losses. Those assets that we own for future growth are the ones that tend to fluctuate the most – tempting us to abandon ship during difficult times. As great as Amazon has done, it has suffered pullbacks of greater than 20% in 16 out of its 20 year stock existence.
You & Your Portfolio
Your portfolio is not going to fluctuate as much as a single stock such as Amazon. Yet fluctuations will occur, and your portfolio will lose value. The very assets we own to help you grow your portfolio are the ones that will likely lose the most during the difficult times. You may be tempted to abandon them, just as investors abandoned Amazon and Apple years ago. And the consequences may be similar.
At some point in the future the market will hit a rough spot. We can’t control nor predict it, but we can control how we respond. While many investors will choose to “adjust” their portfolio (i.e. sell growth assets), it’s important to understand that the moment we do that, we may also be giving up larger long-term returns.