Investing Strategies

There are a wide variety of ways for investors to trade investments.

On the one extreme you have the rigid buy and hold investors.

At the other end of the spectrum are the day traders.

And at various points in between are the bulk of investors.

We will quickly review each today.

Buy and Hold

Buy and hold is exactly as it appears. Identify an asset, acquire it, and then hold it throughout your investment horizon.

If you are relatively young, that may mean you hold the investment for decades.

Buy and hold is an extremely passive form of investing.

Day Trading

Active investing, in perhaps its strongest form, can be seen in day (high frequency) trading.

Speculators may buy and sell the same asset multiple times in a single day. May, because even though they are called day traders, these individuals do not normally jump in and out of specific assets the same day. But the idea is that they are very active traders.

I also prefer to refer to day traders as speculators or traders, rather than investors. Neither are derogatory terms in the financial sense and they do better reflect the activities of day traders than those who actually invest for longer periods.

Somewhere in Between

The majority of investors operate somewhere in between these two extremes.

A variety of factors determine where a specific individual will fit into the spectrum. Variables include: investment expertise and experience; time available to research and monitor investments; risk tolerance; investment objectives and constraints; investor personality; investment time horizon; economic conditions; bull and bear markets, investment volatility.

What is Right for You?

There is no one right way to invest. What works for one person may not work for another.

If you look at investing literature, you will see a wide range of advice.

Some recommend buy and hold as a sound strategy. Others write that buy and hold is dead. An antiquated approach that no longer works in today’s markets.

Some recommend day trading strategies. Usually using technical analysis, there are a variety of systems to take advantage of short-term price fluctuations. Others will tell you that day trading is a fool’s game.

Some recommend mostly passive investing, others suggest more active approaches.

What Do I Think?

Avoid Day Trading

I am not a big believer in day trading success.

Yes, some day traders do succeed. And those are the ones you read about. The vast majority, though, do not prosper.

Day trading can require a lot of capital in order to make adequate money on small price changes. You need sufficient financial expertise and experience. Plus a strong technical system and software tools. Day trading can require a lot of effort; many traders do it full-time. Finally, having a strong constitution is useful as day trading can be a stressful activity.

As I want to discuss long-term investing strategies and I do not believe that day trading is appropriate for most investors, I shall not write much about the subject. There are plenty of articles and books to read if you do want to learn more on the topic.

What I recommend must be viewed in the investing context we have discussed to date.

For Long-Term Success, Follow a Mostly Passive Approach

From my earlier posts, you know that I generally advocate a passive investing strategy.

The emphasis is on matching market returns and minimizing costs in order to maximize compound returns over time. I suggest employing a dollar cost averaging strategy to build a well-diversified portfolio of low cost funds that reflects one’s current investor profile.

With this focus, I think a buy and hold strategy, with a few tweaks, is the best system.

For Non-Diversified Investments, Some Activity is Fine

But if you want to invest in non-diversified investments, such as individual stocks or bonds, I might suggest a more active approach. Not anywhere near the day trading extreme, but slightly more active than under a traditional buy and hold approach.

In fact, for individual stocks, bonds, etc., buy and hold may not be suitable. As we saw with investment quality, what is an excellent investment today, may not be in 10 years. And vice-versa. Purchasing Eastman Kodak in 1950 was a great buy and hold for many years. Purchasing and holding Eastman Kodak in 1980 was not a winning strategy.

And if you get to the point where you want to trade more volatile investments, such as derivatives, then I would suggest an even more active approach.

For now I will focus on helping you build a long-term diversified portfolio that seeks to keep costs down while providing optimal returns. So we will look at the pros and cons of the buy and hold methodology.

I will also touch on some more active considerations. But I will save the bulk of our look at active trading for down the road. At a date when we begin to consider investing in individual, non-diversified, assets.