In his recent article, Tom Lydon writes how the buy-and-hold strategy is getting out of date. More and more market participants finally become aware that investments cannot be easily left alone to grow by themselves.
The market’s meltdown in 2008 has reignited a ferocious debate about the merits of buy-and-hold investing vs. timing the market. When using exchange traded funds (ETFs) as part of your strategy, you do have a third option.
The buy-and-hold side is saying that no one can beat the market over time so sticking to a long-term plan is the way to go. Proponents of the buy-and-hold strategy argue that predicting short market bursts is basically impossible, and they believe that long-term investing provides better numbers. Even considering the recent market downturn, people who invested a long time ago are still significantly up from when they first started investing.
It is merely common sense that individual companies, or whole economies for that matter, have their blooming and inevitable glooming phases. Ignoring this nature of finance is pure irresponsibility toward your money.
The “market timing” side simply points to the fact that those who held onto their investments are probably regretting it, remarks Silicon Valley Blogger for Wise Bread. This part may be true; many investors lost 40%, 50% or even more during the financial crisis. Some of those investors have had to delay or call off retirement entirely. Making up that lost ground could take years.
For the average retail investor, buy-and-hold investing along with regular portfolio rebalancing strategy has proved to be a successful combination. Institutional traders or people with large bank accounts do better with stock market timing since they are able to hire professionals, obtain top resources and use advanced strategies. Of course, an investor may have a long-term investment egg and dabble in the markets with some of loose pocket change.
Market timing and buying-and-holding are two extremes. You do have a third option: trend following.
What is being utilized in trend following is a simple concept that once a trend has been established, it is not easily bent. For example, if the market is rising overall, buyers must be possessing greater power than sellers. Resistance on the way up is therefore merely regarded as a roadblock on the way to even higher prices eventually. Having this in mind, allows the average investor to jump on a spectacular opportunity even at a later stage of the trend. You do not need insider information to invest successfully. Trends are easily spotted by simply looking at a chart.
Proper risk management is key in maintaining our hard-earned savings. The trend following approach suggests that the possible loss is always known before entering a trade because a trend follower sets a pre-defined stop loss area. This is usually the area where the reason for a particular trade is no longer given (say, a break of an uptrend).
As the economist Kenneth Arrow long ago pointed out, most of us prefer a gamble that has a 100 per cent chance of a small loss and a small chance of a large gain to a gamble that has a 100 per cent chance of a small gain but an uncertain chance of a huge loss. By knowing our maximum loss in advance, trading is no longer a risky gamble as it is commonly believed. Now we have to question, who really is the gambler? Someone holding onto falling share prices until its company is bankrupt, or someone who cuts the trade and moves on?
