Another investing debate involves ongoing portfolio maintenance. Should you buy an asset and then hold it “forever”? Or is it wiser to more actively trade investment holdings? At the extreme, high frequency (a.k.a. day) trading. Or somewhere in between day trading and never selling. An introduction to the “Buy and Hold versus Active Trading” debate.
All that and more in Episode 52 on the Wilson Wealth Management YouTube channel.
“What is a Buy and Hold investing strategy?”
As the name suggests, you identify an investment. You purchase it. Then hold it throughout the entire time horizon. That may be 3 year time horizon in amassing a down payment on a new home. It may be 40 years for your retirement.
“Is Active Management the same as Active Trading?”
Yes and no.
Active management is the investment strategy. Where asset managers decide they will identify good (and bad) investments and market timing opportunities. Then trade accordingly. Many professional money managers take a longer term approach to their holdings. Although, in this context, longer term may be 2-3 years. Not 40. Identify strong assets, buy, then hold until the target price is reached or circumstances change.
Active trading is more the investment tactic to achieve one’s strategy. Though, not always. Depends on the nature of the investor and strategy.
Strategy is the overall, long-term, planned approach. Tactics are the short term processes used to implement the strategy.
For me, active management typically means I identify an investment strategy. Perhaps outperforming the US large cap equity market. I comb through the S&P 500 index and identify the best stocks. Invest in them and ignore the rest. I also over or underweight sectors or stocks based on overall market conditions. The timing aspect. Through these I should beat my benchmark index.
Active trading is the implementation of the strategy. Maybe I determine only 50 stocks are worth owning. I buy them and trade as they reach the target price, a better holding is determined, or a market shift is anticipated. The frequency of the trading is a reflection of meeting my strategic objectives. Not just trading for the sake of trading.
Yes, the same thing. But usually a different meaning when discussed.
And yes, some investors do trade for the sake of trading.
“What is High Frequency trading?”
Also known as day trading, these investors can be very active. Possibly buying and selling the same holding multiple times in a single trading day.
Day traders normally use quantified technical analysis to identify price inefficiencies in assets. Or pricing trends. They may buy and sell in rapid fashion to take advantage of these small variances.
In this case, the high frequency trading is its own investment strategy.
“Which approach do most investors utilize?”
Most investors are not day traders. That area is more of a niche that requires special skills, experience, and time commitment. As well, these investors often require significant capital to invest.
That said, most investors are not hold forever, either.
Most investors buy when they believe the markets are down or a specific investment is trading at a discount to fair value. These same investors may divest when they believe the market or asset is over-valued. Perhaps they sell and move on to other investments. Or they wait for a downswing and then repurchase the same holding.
Market timing, type of asset, and emotional considerations all play a role in trading frequency. My general belief is that the average investor trades too frequently and that hurts performance and portfolio growth.
“What part of the spectrum do you think is the sweet spot?”
How active one should be as an investor tends to be more a function of the asset itself.
If you are invested in a well-diversified, low-cost, index fund, that is an investment that can be held forever without issue.
If you are invested in non-diversified or highly volatile assets, you may need to monitor more closely. And fine tune periodically.
I tend to prefer well-diversified index funds for investors. So, I am more on the hold forever side. However, “buy and hold” does not mean “buy and forget”. There must be mechanisms in place to ensure the quality assets you own remain quality assets in the future.
A quick introduction to Buy & Hold. We will get into more nuance over the next few episodes on the relative advantages and disadvantages of this approach.
