“Whether you’re excited or nervous when your favorite asset falls in price marks whether you’re investing or merely speculating.” – Naval Ravikant
Are you investing or merely speculating?
Naval Ravikant had an interesting take on this most important of questions (see above quote). The deciding factor: whether you’re “excited” or “nervous” to see your asset going down in price.
Why in the world would anyone be excited to see something they own moving lower?
Because it is giving them the opportunity to reinvest interest/dividends and add new capital at discounted prices. If you have a long enough time horizon and a diversified portfolio, buying at lower prices will increase your long-term returns. Which is why a stock market crash is the best thing that could happen to young investors.
How do you know if your time horizon is “long enough”? Examine the odds…
Holding stocks for a day or a week is not much better than a coin flip. In that time frame, you don’t have the luxury of waiting for stocks to come back and any decline should make you nervous. In contrast, holding stocks for 20-30 years has never yielded a negative return, even for investors who bought at the peak in 1929 and held throughout the Great Depression. If that is your time frame you want stocks to go on sale – the earlier, the better.
Data Source for all Charts herein: Bloomberg, YCharts.