Saturday, October 1, 2016

Buy-And-Hold Investing Vs. Market Timing

Courtesy : Investopedia


If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment. Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles
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For investors in the stock market, it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles. However, what's even more important than how you define long term is how you design the strategy you use to make long-term investments. This means deciding between passive and active management. 

Long-Term Strategies
 
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature.


Active Management
 
On the opposite side of the spectrum, numerous active management techniques allow you to shuffle assets and allocations around in an attempt to increase overall returns. There is, however, a strategy that combines a little active management with the passive style. A simple way to look at this combination of strategies is to think of a backyard garden. While you may plant different crops for different results, you will always take the time to cultivate the crops to ensure a successful harvest. Similarly, a portfolio can be cultivated along the way without taking on a time-consuming or potentially risky active strategy. 


A good example of this method would be in tax management for taxable investors. For example, a security or fund may have an unrealized tax loss that would benefit the holder in a specific tax year. In this case, it would be advantageous to capture that loss to offset gains by replacing it with a similar asset, as per Tax rules. Other examples of advantageous transactions include capturing a gain, reinvesting cash from income and making allocation adjustments according to age. 

Timing

When it comes to market timing, there are many people for it and many people against it. The biggest proponents of market timing are the companies that claim to be able to successfully time the market. However, while there are firms that have proved to be successful at timing the market, they tend to move in and out of the spotlight, while long-term investors like Peter Lynch and Warren Buffett tend to be remembered for their styles.




This is probably one of the most commonly presented charts by proponents of passive investing and even asset managers (equity mutual funds) who use static allocation, but manage actively inside that range. What the data suggests is that timing the market successfully is very difficult because returns are often concentrated in very short time frames. Also, if you aren't invested in the market on its top days, it can ruin your returns because a large portion of gains for the entire year might occur in one day.

The Bottom Line

If volatility and investors' emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice. In reality, however, just like with a garden, a portfolio can be cultivated without compromising its passive nature. Historically, there have been some obvious dramatic turns in the market that have provided opportunities for investors to cash in or buy in. Taking cues from large updrafts and downdrafts, one could have significantly increased overall returns, and as with all opportunities in the past, hindsight is always 20/20.

56 comments :

  1. Sir, what do you think about Hindustan oil exploration company(HOEC)?
    Ashok Goel of Essel Propack has bought a 14.15% stake in the company. The company has got new MD, what do you think of all these moves ?

    ReplyDelete
    Replies
    1. Yes, some positive developments happened recently , now they are waiting for environmental clearance of Assam Gas project which may act as the next trigger.

      Delete
  2. Sir, I have missed lakshmi energy and V2 retail. They have run up more then 100% in recent times.

    is buying on dip/correction a good strategy? similarly with Samkrg Pistons?

    Thanks

    ReplyDelete
    Replies
    1. Risk level also increased correspondingly

      Delete
    2. Sir Risk level also increased correspondingly means is it regarding a particular stock(akshmi energ, V2 retail,Samkrg Pistons) or in general of the stock market.

      Delete
  3. Hekko VP Sir,

    Thanks for your valuable post.

    Can you share your views on Inox wind., and is it right time to enter Lakshmi and valiant or Marksans?

    ReplyDelete
  4. Excellent one sir, it gives me some more confident in long term investment.

    ReplyDelete
  5. Sir, Your views on Pricol? Do you see it cab turn around?

    ReplyDelete
    Replies
    1. Yes I think so , stock price also appreciated substantially on this expectation.

      Delete
  6. Sir what are ur views on amarjothi spinning ? Company post superb numbers. And looking a value buy .ur views plz.

    ReplyDelete
    Replies
    1. Last quarter was good but company not showing consistency in its numbers , that's the issue.

      Delete
  7. Sir, Please share your views on Gintajai Gems ? I am long term investor with high risk appetite . Thanks

    ReplyDelete
  8. VP sir your view on Bharat Electronic Limited.

    ReplyDelete
  9. Hello Sir,
    Festive greetings!

    Could you please share your latest opinion on Panacea Biotec?
    Thanks for your valuable opinion.

    Regards,
    Prasanna

    ReplyDelete
  10. Dear sir
    Willing to know your ideas about swan energy.
    Thank you

    ReplyDelete
  11. Dear sir, pls provide your views on basant agrotech is it the right time to buy it.

    Thks,
    Shailesh

    ReplyDelete
  12. Sir ur view on bambino agro

    ReplyDelete
    Replies
    1. Nee to wait and see the impact of cancellation of the selling agency agreement with two firms .

      http://www.bseindia.com/corporates/anndet_new.aspx?newsid=dc7bad3b-1c7a-4231-b353-9ca6e3808522

      Delete
  13. Dear VPg, your view and help on PMC fincorp and Allied computers please ?

    ReplyDelete
  14. Dear VP Sir,
    Do you think (GEI Industrial Systems) is a buying opportunity now for a high risk taker investor?
    Thanks

    ReplyDelete
    Replies
    1. Earlier suggested to shift from this one to Patels Airtemp , as of now not tracking it.

      Delete
  15. Sir, any change in views on SINTEX?

    ReplyDelete
  16. Dear VP ji
    CIL Nova petro a worthy one?
    Also willing to know your views on Cambridge technology solutions.
    Thanks.

    ReplyDelete
  17. what is your opinion on GHCL at CMP?

    ReplyDelete
  18. Please share your views on wallchandnagar

    ReplyDelete
  19. Sir, is era infra banned from trading?

    ReplyDelete
  20. Dear VP sir
    Are you tracking ppap automotive. Will it has the potential to improve its bottom line.
    i.e. now automobile industries are in good line
    What's your views about its growth.

    ReplyDelete
  21. Dear sir wat do u think about gtl infra and gtl?

    ReplyDelete
  22. Sir ,
    Do you track any of the following

    1) Fedders Lloyd Corporation Ltd
    2) RS software
    3) Bombay Dyeing
    4) Phoenix Lamps

    Thank you.

    ReplyDelete
  23. Sir,
    Can you provide your view on Pressman Advertising ?

    ReplyDelete
  24. Dear Sir,

    Are you tracking any of the sugar stocks. Any interest in Dhampur or KM sugar?

    ReplyDelete
    Replies
    1. I don't think risk reward ratio is favorable in case of many sugar stocks at CMP.

      Delete
  25. VP sir, even Goldman Sachs is following your blog now. They just bought goodyear yesterday :)

    ReplyDelete
    Replies
    1. :):)
      Goodyear suggested @ Rs.300

      http://value-picks.blogspot.in/2013/08/goodyear-india-one-tyre-for-your.html

      Delete
    2. Hats of you sir,your foreseen is unimaginable for us

      Delete
  26. Sir what is your view on Lloyd electric and reliance communication?

    ReplyDelete
  27. Dear VP Sir. Please advise your opinion on Orient Refactories.

    ReplyDelete
  28. Dear VP
    What about orchid I hold 4000 shares pls advice

    ReplyDelete
  29. Respected VP Sir...

    Are you still tracking MIC Electronics, there have been many good positive fundamental news for the company lately, Recd Patent, Trial order from Railways, Debt restructuring ... but the share price does not seem to respond too all the good news...
    had bought the share 1 year back around 21 and now been averaging upto Rs 15... do you think and feel the same as what i feel " We are just Lucky to Add more at CMP " or should we look at some other stocks ..
    PLease advice ..

    Regards
    Manish

    ReplyDelete
  30. Sir wanted your view on IDBI Bank stock...with the divestment planned and the talk of Asian Devoplment Bank aquiring stake...is it a good bet in the medium to long term?

    ReplyDelete
  31. Sir, i request your views on the following stocks

    1. Sybly Industries
    2. Vikas Ecotech
    3. Aksh optifiber
    4. Meghmani Organics

    Thanks as always

    ReplyDelete
  32. Dear sir please your view on TNPL &AARTI IND

    ReplyDelete
  33. your view on gujrart alkalied and chemicals please

    ReplyDelete
  34. Sir please share your view on sunil hitech engineer

    ReplyDelete

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