Buy-and-Hol🐭d Investing v🃏s. Market Timing: An Overview

If you were to ask 10 people what 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:investment styles.

For investors i൲n the stock market, it is a general rule to assume that long-term assets should not be needed in the three- ꦛto 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 澳洲幸运5官方开奖结果体彩网:long-term investments. This means deciding between buy-and-hold (澳洲幸运5官方开奖结果体彩网:passive management) investing or marketing timing (acti🎐ve management).

Buy-and-Hold Investing

澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:passive in nature.

Figure 1 shows the potential benefits of holding positions for longer periods of time. According to research conducted by 澳洲幸运5官方开奖结果体彩网:Charles Schwab Company in 2012, between 1926 and 2011, a 20-year 澳洲幸运5官方开奖结果体彩网:holding period never produced a negative result.

Figure 1: Range of S&P 500 returns, 1926-20𓃲11

Source: SchwabCenter for Financial Research

Market Timing

When it comes to 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:Peter Lynch and Warren Buffett tend to be remembered for their styles. Figure 2 below shows returns frꦡom 1996 to 2011.

Figure 2: S&P 500, 1996-2011

Source: SchwabCenter for Financial Research

This is probably one of the most commonly presented charts by proponents of 澳洲幸运5官方开奖结果体彩网:passive investing and even asset managers (equity mutual funds) who use static allocation but manage actively inside that range. What this 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.

Special Considerations

On the opposite side of the spectrum, numerous active management techniques allow you to shuffle assets and allocations around in an attempt to 澳洲幸运5官方开奖结果体彩网:increase overall returns. There is, however, a strategy that combines a lit🔯tle 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 m🧸ay 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 ♒澳🥂洲幸运5官方开奖结果体彩网: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 IRS rules. Other examples of advantageous transactions include capturing gains, reinvesting cash from income, and making allocation adj꧅ustments accordin𓆉g to age.

Key Differences

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 alwa🙈ys 20/20.