I have traded stocks for many years and tried to time the market. I have realized that it is a very difficult thing to do. There are many disadvantages for someone like me to time the market. Firstly, I don’t have the time to watch the market every second as market direction changes very fast. Secondly, I don’t always have access to all the news and resources as a large institution would have. Thirdly, fees add up and become very expensive over time. I can’t believe I’m saying this, but I think it is very difficult for the average person to beat the market. For those who would like to know why, read A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel.
Therefore, it’s much better to build a portfolio that can I don’t need to watch constantly and one that can weather the storms in the stock market. What that means is that I would like to have a portfolio that does not move as volatility as the stock market. It would be a less speculative stock portfolio. I could not expect a 100% return, but at the same time, a more stable portfolio will help mitigate risk and slowly rise in time. It’s akin to a turtle in a race that moves slowly but steadily towards the finish line. My goal is to set up this portfolio to produce passive income for life.
In summary, this portfolio should:
Be stable and not be wildly affected by the daily movements of the stock market
Have companies with strong balance sheet and positive earnings
Is buy-and-hold as an investment strategy dead? The answer to that question is the same as the answer to each of the following questions:
1) Can you successfully time the market?
2) Should you chase returns?
3) Is the average investor smarter than the professionals with all those resources at their fingertips?
No, no, no and no. Buy-and-hold, however, as the best investment strategy assumes a long term investment horizon – like ten or even twenty years. Even Warren Buffett says his “favorite holding period is forever.” In fact, if you look at market returns going all the way back to the late 1800’s, you’ll find that the average rolling 10-year return from any given month is about 9% a year.
Curiously, though, folks who proclaim buy-and-hold dead use volatility measured in much shorter periods, like months, weeks or days as a reason that it doesn’t work. It is true that buy-and-hold will not outperform every day, week, month or even year – look at any down period as proof of this. You might find yourself thinking that you can create alpha and generate better returns by pursuing anything other than a buy-and-hold strategy. Don’t fall into this trap . . . because at the end of the day (or decade, in the case of long term investors), a buy-and-hold strategy will increase returns and reduce risk.
Buy-and-hold requires commitmentto a long term horizon. Investors can not try it out for a quarter or two, or a year here and there – if you “try” it for a short period, you might end up also proclaiming it as a strategy of the past. A strategy for losers. If you find yourself asking how buy-and-hold has done year to date, the strategy isn’t for you. Those that want to proclaim buy-and-hold dead are those without the patience to follow it. As John Madden said, “the road to easy street goes through the sewer.”
REVERSION TO MEAN AND THE EFFICIENT MARKET
The market always reverts to its mean (by definition) – in fact, this is Rule #1 of Jack Bogle’s ten rules of investing. I’m a believer in some sort of weak version of the efficient market hypothesis (EMH). The EMH is the idea that one can’t consistently beat the market without increasing risk – it states that the market itself is efficient and its performance is based on all the information about stocks that is available.
Admittedly, there are certain anomalies that might allow for opportunities to beat the market over the short term (only). For example, investors/hedge funds with access to master limited partnerships and other alternative investments in smaller markets may be better positioned to actively manage their investments. Among many reasons, a) these investments are less liquid than the broad equity markets, b) these smaller markets generally keep out larger players who could move the market, c) these funds are run by uber-experienced managers in their space and d) such markets are heavily retail – that is, they are held by folks who tend to make rash decisions at precisely the wrong time (i.e., you – more on this below). In illiquid markets like this, these factors exacerbate price movements and may provide opportunities not seen in the broader general markets – making them inefficient by definition.
But we would be wise to leave those strategies to the professionals with high powered computers (that you don’t have) using proprietary algorithms (that are not available to you) that process research (to which you don’t have access). Even with these advantages, however, only 20-35% of professionally managed funds beat the market over the last five years.
That’s right, even the professionals can’t beat the market. Neither can you.
So let’s assume that over the long term the broad based markets are at least quasi-efficient. Maybe there is some room to create alpha and some areas where real, risk-adjusted gains could be achieved. But after taking into account fees, commissions, cost of research, acquiring information, etc. –consider the markets efficient – at least for most people.
Now, toss in the inherent difficulty (impossibility?) in distinguishing between the skill and luck of investors (especially over time horizons that we humans like to) and the propensity for people to buy and sell at the wrong time (for all the behavioral and emotional reasons we all know and love) . . . well, this makes buy-and-hold the right call for 99% of investors.
YOU CAN NOT TIME THE MARKET
In fact, most investors miss out on the good times precisely because they jump in and out of the market at the wrong moment. They think they can time the market. They make investment decisions based on emotions. In the 20-year period ended in 2013, stock investors earned only 5.0% a year due to terrible market timing, nearly 4 percentage points less than a buy-and-hold strategy. Why? Because we are terrible at investing. We chase returns. We react to fear. We buy into the media hype. And we invest emotionally.
Emotional investing causes most of us to buy high and sell low. In fact, the year 2000 saw a historical record inflow into domestic equity funds. Immediately following that the market dropped almost 50% (fueled by the dot.com bubble bursting). In 2008, the opposite occurred as a record was set for the most outflows of funds from domestic equity funds. What happened next? The market has been on an unprecedented climb since then, with returns reaching almost 200% from the market low. As of the date of this article, it’s still climbing. And most investors missed out on that recovery.
But . . . what if you could avoid the bad days . . . ? If you thought you could time the market and miss all the bad days, you’d be in great shape. But if you get out of the market at the wrong times, you also end up missing out on big rallies. If you missed out on just the 10 best days in the 20-year period ended 2013, your average annual return would have dropped to 5.5%. Miss the 30 best days and your return is 0.9%.
The naysayers might point out that starting in 1990, the market has reverted to within 1% of its opening value at least once in every given year. If that’s the case, investors would have killed it by getting in at the low, then selling at the high. Rinse. Repeat. Seems simple enough. Ahhh, if only we could invest looking in our rear view mirror. If you think you can successfully implement this market timing strategy, go back up a few paragraphs and re-read.
DO NOT CHASE RETURNS – STAY DIVERSIFIED
A passive investment style means that as an investor you do not chase returns. You should not expect that an investments’ past performance from last year will continue the next year. In fact, most stocks and funds that beat the market in the past generally will not do so in the future. Good past performance is often a matter of luck. This is why active investors who constantly chase returns get burned. Why? Because past performance is not an indication of future performance.
Here is a fun fact for you: n the fifteen years prior to 2011, 46% of actively managed funds closed because their performance was so bad. During that same period, 7% of funds failed every year for the same reason. And these funds were run by professionals! You still think you can beat the market?
Go online and pull up any periodic table of investment returns and you’ll get a great visual of how a diversified portfolio beats trying to pick sectors over the long term. Plus, most of them are really colorful and pretty. But believe it or not . . . studies have shown that past returns remains the primary investment decision most investors consider when choosing among investments!
Actively managed funds have an average expense ratio of 1.25%; passively managed funds have an average expense ratio of 0.25% expenses. One percent may not sound like much, but when you strip one percent off of the historical average of around 8.5-9%, then it becomes much more meaningful because it equates to almost 12%. So if you go the active route, you are losing almost 12% of your annual return. How does this translate into dollars . . .? Well, if you invested $100,000 over thirty years at an average return of 8.5%, paying for those higher expenses/fees would cost you approximately $280,000 (~$1,072,000 passive versus ~$792,000 active).
So if all investments (active v. passive) ultimately produce the same average returns over the long term (i.e., they all revert to their mean), why would you pay much more for the actively managed funds? Indexing/passive investing will make you more money because it provides the same returns as active investing at a much, much lower cost.
Another fun fact: in just about every Morningstar category for the ten years recently ended, low cost funds outperformed the high cost funds. You know that past performance is no indication of future returns. What you might not know, however, is that the single most accurate predictor of future returns is low fees. That’s rights . . . studies have shown that focusing on low fees solely would result in better returns for investors. When looking at factors such as past performance, manager tenure, expense ratios and Morningstar ratings – expense ratios were the only reliable predictor of future performance. From Morningstar’s own Director of Fund Research Russel Kinnel: “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds. . . . Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”
NOTE: STRATEGIC TILTS ARE O.K.
It isn’t necessarily a bad strategy for portfolios to have some allocation in a proactive strategy. Allowing a small portion of one’s portfolio to be used to play strategic tilts certainly makes it less boring and keeps investors engaged. After all, buy-and-hold isn’t the sexiest strategy, but it works. Use a small proportion of your holdings for proactive investing and strategic tilts – it will keep you engaged. But do not actively try to time the markets, chase returns or invest emotionally with the bulk of your portfolio. Take the average 8.5% annual return to the bank over the long term. You’ll be happy you did.
ABOUT THE AUTHOR
Rob Pivnick is an investor, entrepreneur, attorney, residential real estate investor and financial literacy advocate. Rob has both a law degree and an M.B.A. from SMU in Dallas, TX. He is a member of the board of directors of the Texas affiliate of the national Council on Economic Education. Professionally, Rob is in-house counsel for Goldman, Sachs and Co. and specializes in finance and real estate.
ABOUT ROB’S SAVING & INVESTING BOOKRob’s book, “What All Kids (and adults too) Should Know About Saving & Investing,” targets young adults/millennials with vocabulary words, fun facts, “Did you know?” sections and 14 key takeaways. Statistics, charts and graphs from expert sources bolster the information. It aims to help students develop proper habits for saving and investing for long term. Not get rich quick. Chapters include budgeting, debt, setting goals, risk vs. reward, active v. passive strategies, diversification and more. Visit www.whatallkids.com for more information. Twitter: @RPivnick.
Alibaba (BABA), the largest e-commerce company has finalized their IPO price at $68. The first day of trading BABA in the secondary stock market is Friday, September 19. Alibaba will also be the biggest IPO in US, raising $21.8 billion. The company is a mix of Amazon and Ebay and is largely profitable. For more information, check out this page to learn more about Alibaba.
I will try to pick up some shares in the stock market tomorrow if the price does not soar too high. What do you think of the Alibaba stock? Will you buy it? Let me know your thoughts below.
High-frequency trading (HFT) is a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities
Understanding some of the different ways of trading in the stock market can open your eyes to the opportunities that exist. Learning how you can make your capital grow at the rate you are happy with, but understanding the risk involved is also an important factor in the participation in some of the high risk trading options.
High frequency trader is a term used for companies that use computers and algorithms to determine the options that are going to make money. But it is not about the length of term that the stock is held for or a percentage of profit, they are looking for profit and short term investing. The profit could just be as small as a few cents per share but if you multiple this by the number of transactions that can be processed by these high frequency traders then they are making serious money.
It is about the amount of transactions; slow computers can cost a company money because they are not able to trade fast enough. It is about speed and power in this section of the industry.
The amount of high frequency trading that is happening on the markets is increasing each year, along with the technology and the computer algorithms that allow for the computers to detect a profit margin, in the stocks and shares that are being sold and traded. The more that a company can trade at this high frequency trade rate the more money they can potentially make.
These companies are not trading with long term investors, these are typically a different market strategy, and they are looking to trade with other high frequency trading companies. This type of trading has more risk because you are looking for the smaller pockets of profit and to trade them on quicker, you are not looking at sitting on the investment for a long time. This means that you are looking to turn a quick profit and this isn’t always going to happen, so along with the potential to make large profits so, too, is the potential to make losses.
Supplement Liquidity Providers (SLP)
This fund, created in 2009 to help the high frequency traders, pays a rate for the trades in the high frequency trading market; the amount per transaction is tiny but multiplying by the numbers of trades and this produces a great return for the privilege of this type of trading. It allows the liquidity of the markets to keep moving, the lack of liquidity was blamed for the crash of a company in 2008. For this reason, the New York stock exchange created the SLP to ensure that the future of the liquidity was not going to be questioned again.
Therefore, if you are looking to increase your capital, then considering the option of high frequency trading could be the answer you are looking for. But remember this option is risky and you could lose more than you make.
Understanding the influences on the stock market might allow you to understand the principals of what makes the changes possible, could influence how you make your capital work and the companies in which you invest your money.
The basic concept of how stock prices rise is:- if the demand is high and the available stock or shares are low this raises the price; for stocks to fall the demand has to be low and the amount of shares available could be high, therefore more investors are selling than there are buyers to purchase.
What makes a company worth investing in?
Looking at a company you must be prepared to work out if it is a good investment. Is it popular in the press or has it had bad publicity lately? Bad press can push the value of the stock down; this is bad news and people automatically want to sell their shares. If on the other hand the news is good, maybe they have had a great quarter and their profits are up, this will be reflected on the stock market with a rise in the price of the stock.
Knowing when to purchase stock and when to wait is a skill that is learnt with time and practice. But there are more areas you need to consider before making any decision. You need to know if the company is going to fit into your investing plan, what sector you are looking at and the return that you hope to make.
If, after you have found a company that fits with your basic ideal, then you need to make a more detailed look at the company. You are, after all, putting money into the business, so making sure that its accounts and the balance sheet are favourable. Having a detailed plan that you use each time you research a company will mean you follow a strict guideline, ensuring that the company meets a pre-decided business check.
Knowing how the company has performed
Knowing how a company has performed in the past is no guarantee of their future performance. It can make it difficult to judge the potential of this company in the future, as with all investing it is a gamble, going on past performance is not a fail-safe solution. But often it is the only data that you have available and you then have to make a judgement as to the potential for the company in the future.
There are some companies that you might think will be around for years, and not bother with the research; this is not a great idea, there are older companies that are having problems like some of the less mature companies.
Therefore, it is vital that you understand the company before you invest any money and you are sure that you have understood the position that it is currently holding on the stock market. You might find that with research a company that seems good in principal, might not be worth the money in investing, if the company’s position on the market has shown little change over a period of time. There is more to investing than putting your money in a company and hoping for the capital to grow.
When there is a poor response in the market many people are pushed towards the gold market. This area seems to be the first place that investors assume is going to be the option that is going to be the safest bet.
Gold has been the staple for many years as the commodity that is great to invest your capital in; you have the gold rather than a share in a company. However, is this still true, is gold the market that is the safest option when the market performance seems poor?
Obviously, it is going to be an individual choice and not an option that you should choose without doing the necessary individual research, to determine if this is going to be the way that you would consider proceeding.
Disadvantages to gold
There are obvious disadvantages to the gold market compared to the stock markets; investing in precious metals is going to have the benefits of an actual product rather than just a percentage of a share in a company.
But you will need to store your gold if you are considering to hold onto the gold for a period of time. This has its own risks that you will need to take into consideration, storing these at your home would need to be covered in your home insurance and this can increase the policy quite considerably. The alternative is to store them in the bank in a safety deposit box. This isn’t going to be free; you are going to need to consider the price of storage of this method.
Another option is to buy and sell your gold through a broker; this could be the best bet because you might not even need to see the gold or precious metal that you have purchased. This is great if you are looking for an option that is going to allow you to invest in the precious metal market, but without the headache associated with the storage of the commodity as well.
But trading in this manner could give you the best option, you are buying a certificate for the gold that you actually own without the need to consider the storage, insurance or the potential of becoming a target of theft.
Is it a great investment
Gold and precious metal is the basis that the developing world has grown upon. It is indicated in the American Declaration as one of two options that are considered legal tender, the other being silver. It is not going to go out of existence in the near future, but there is no guarantee as to the price of the commodity in the future; the price of gold and other precious metals fluctuate, which is very similar to the stock market with the ups and downs. Whilst you will still have the actual gold, you might lose some of the market value with the dips in the value of gold per ounce.
There resources on the market that can tell you what to do and how to make money. But being honest the best example to follow is going to be Warren Buffet, he has made his money and he has been very successful at this and following his example and thinking like him could be the turning point for you and your investment portfolio.
The most important item to learn from Warren is not to allow your emotions in on the deal. If you are distracted by how you feel, it could lead you to make a mistake in your investment portfolio.
Learning about the company that you intend to invest in and make sure you feel comfortable with that company before you put any money in. But an important part of investing is making decisions, if you feel confident with the company and their ability to trade and make you money, then invest. But make sure that you are investing with a business mind and not an emotional head. This could lead you to an inability to stick with your investment and might cause you to move money and investments before they have had a chance to work.
You will end up paying more tax and commission this way too, it can cost you more than you make.
Warren Buffet and bench marking
If you are unsure about bench marking it is about an agreed point that you have decided, as your point of exit whether it is a high point or a low point, know these in advance and they can save you a lot of time and worry.
Bench marking is a great item to set when you are investigating the company, it will be at this point that you are learning information as to the past performance and the potential growth of the company. Setting the benchmark here takes the pressure off, you haven’t at this point invested in the company and this will make these decisions with less emotion and more with the logic and the information to hand.
How many companies to invest in
It is often a difficult question to answer but even though it is important that you spread your investment. It is also important that you are not spread too thinly because this will slow your investment potential down too great and can increase the length of time that you need to see return on your capital.
You can use many ways as a guide to how you want to invest in the markets. For instance, Warren Buffet chooses not to invest in mutual funds because of the potential of spreading the investment into too many different funds and this is against his ethos.
What is important is taking the information and using it for your purposes, plan how you intend to invest and put this plan into action. But beware it is possible to lose money as well as to make money on the stock market, the risk varies depending on the product but the risk is still evident.
There are exciting times ahead with the availability of ETF’s that are going to become available. It will be possible to use these exchange-traded funds and to make money on them. They are increasingly popular in the stock market because it doesn’t matter the amount of capital that you have to invest, you can make it work and work hard using the ETF’s that are available.
The most exciting news is the possibility of having access to the new floatation on the stock market of the Alibaba Group. This floatation is highly anticipated news and one that is going to send the stock market into a flurry. Unlike the problems that were experienced recently with the floatation of the King Digital Entertainment, which saw the price in shares drop dramatically from the IPO price that it was floated at, on the stock market. This is the company responsible for the Candy Crush Saga and other similar games. Unfortunately, the investors haven’t believed in the company’s ability to produce highly sort after games.
The Alibaba Group is one of the biggest companies floated on the stock market, since the Facebook floatation nearly two years ago. They have chosen the American stock market over an option closer to home because of the ability of the owner to stay in control of the company in America, in Hong Kong for instance, you lose the power in the company. This might explain why no large company in many years that has chosen the Hong Kong market for floatation.
Where people are investing in the ETF’s market
People seem taken with the older companies as the place to invest rather than the new. This is great news if you are fully aware of the current markets. But what if you are new to this area? Is it going to be easy to find the companies that are doing great? The important area that you must consider is the independent research that you will need to complete in each area; if you are investing your capital, you want to make sure that you are not just following blindly without knowing the reasons behind the move. This is important with any investing option; know your market, as well as the company that you are considering, even in the ETF market, which has more scope than just buying shares.
The computer industry and the social media sites are as popular as ever, so long as you are aware of the particular company and the potential that is has for the long-term investment and the potential growth for your capital.
Therefore, if you are looking into the ETF’s this year then you will be following a very popular way to increase your capital. They have experienced a very slow start in popularity but this is changing; it is the year of the ETF’s. Doing your homework on the ETF that you are considering is important, this will ensure that it is the right investment opportunity for you and your capital.
There are exciting world trends that are happening around the globe that allows growth, development and the chance to make money. There is more to making money than just on the world stock markets; other areas are taking the world by storm.
Cryptocurrency market trends
A great example of this is the popularity of the cryptocurrency market trends; there are a number of great currencies out there that are doing very well, it doesn’t matter if you are mining the currency or just using the currencies to buy and sell goods.
The cryptocurrency markets have had some turmoil with the problems that have overshadowed the markets since the beginning of the year when the ill-fated company, Mt Gox Exchange filed for bankruptcy, after losing millions of dollars of customer’s money, to computer hackers.
Stock market prices
As always, there is movement in the stock markets with prices rising and falling of the various stocks and shares. But the company that has made the biggest news is King Digital Entertainment. They recently floated the company on the stock market with an IPO price of $22.50, unfortunately, the traders and investors didn’t like the stock and prices have fallen sharply.
Many believe this is due to the difficulty in producing great games that are going to go viral. The company has managed this with Candy Crush and Farm Hero’s Saga, but these are just two very popular games from over a 100, that are already out in the world that have very limited popularity compared to the two many games.
How can the company prove, two games that have made the company very rich, but the question is can they continue this winning streak formula?
Indian Stock markets
There has been much speculation for the Indian stock markets to grow and develop if the government moves forward with the current reforms that are set to improve the growth and development of the country, and reduce the current high inflation that is causing many investors to view the Indian stock markets as a too risky investment option. This leads to a stagnant market and doesn’t promote the investment markets around the world.
The Indian government is reducing spending and has increased the interest rates with the aim that will help the confidence to return to these unstable markets.
Many are not convinced that enough is happening to remove the pressure that investors are feeling and demonstrating with their cautious actions.
Therefore, it is evident that there is a lot happening around the world in investing and making or using money. Some areas that you could invest in but are risky options, including the current situation regarding the game company King Digital Entertainment and the whole situation in the Indian stock markets.
What is important to realise, are the changes that happen on a daily basis and how they can have an overall effect on the markets, pushing prices up or making them crash back down. There are no guarantees in the markets and no matter where you put your money there is always a risk that you could potentially lose all the capital that you invested in the first place.
However, when you are considering adjusting your market share there is only one reason for the change. This is change in your own personal circumstances. This should be the only time that you should consider moving your investments or changing how you are managing your investment portfolio.
When to adjust
To understand your investments you need to understand the risk and the length of time that they require to make you money. This means learning what investing is all about as a way to grow your capital. There is little point in going into the investment markets if you have no capital with which to fall back on, if you suddenly face an emergency.
You have to plan for the long term; a minimum of five years that you should be investing. But you need to consider the reason for creating growth; if it is for retirement then the longer that you have to invest and grow the money the better off you will be when you reach retirement age.
However, there are times in your life when changes occur and this will reflect in your portfolio, it is not when you just feel like moving capital around. This isn’t the best options for your money, you need to plan and stick to the plan until circumstances change.
The risk with your market share
Before you start investing, you need to be aware of the risks involved in investing. Discuss your concerns with a financial advisor; they will be able to judge the risks that you are comfortable taking. This ensures that when you have invested in a product you are happy with the risk involved with your capital. If this is the only money that you have, creating low risk options until you have built adequate capital could be your best option.
If you have planned properly, when there is a hitch in the investment sector and an investment isn’t performing as it should, you are fully aware of the risks involved with your capital and you are happy to sit and ride out the storm.
Some people have built their money with a different perspective and this can work too. They look at the options involved and set out a plan when an investment would require selling; this would need to have a set of guidelines that you work with allowing you to make the same decisions and to remove the emotional element out of your investment portfolio.
Emotion can be the evil that you are trying to avoid at all costs; it can cause more problems and can mean making decisions not based on fact.
Warren Buffet has made many statements that point to the investor removing emotion from their investments as a way to stay ahead of the investment game.
‘Good investing is about controlling your emotions and temperament. Buffet says it is temperament not intellect that counts the most.’
Therefore, adjusting your market share is not something you should consider unless it is time for your annual review of your investment portfolio, only then make changes upon recommendations that are in-line with changes in your personal circumstances.