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Stock Market Recovery

On February 28, stock markets around the world plunged after the Shanghai exchange dropped 9%. The Dow lost more than 500 points in a matter of hours. On finance message boards (eg Morningstar) which I sometimes visit, people were talking about dumping their stocks to "minimize losses". There was plenty of talk about the beginnings of a prolonged bear market.

As a buy and hold investor, I ignored the noise and made no transactions whatsoever. On paper, I lost 3% of my portfolio. I thought I was doing badly year to date until I checked my quarterly statements on my accounts the other day. I was pleasantly surprised to see that my portfolio has recovered smartly and that I am actually positive 4% year to date (which at this pace should return 14 to 16% annualized). Not too shabby for 3 months of doing nothing.

Those who sold their stocks on Feb. 28 and the days after that unfortunately realized their losses. They also had to pay commissions to their brokers and taxes to Uncle Sam, when they could have avoided all of this by simply sitting tight. To paraphrase Warren Buffet, inactivity is often the best response to market volatility, provided your portfolio is well-diversified and you are investing for the long term.

Comments

  • Naruto KunNaruto Kun Member PExer
    +1 ako sa iyo tekton12. kaya lang majority of pinoys are not like that. masipon lang ang kalabaw nila e withdraw agad ng investments. gusto in and then out agad. if they want this, buti pa nagsugal na lang. alam mo agad kung panalo o talo ka
  • tekton12tekton12 Member PExer
    Hi Naruto kun,

    The short term mentaility is not unique to Pinoys. It's also very common here in the States. It's human psychology - the inability to delay gratification....the desire for instant wealth. A bird in the hand is worth more than 2 in the bush, as the saying goes.

    This short term mentality has been magnified by the availability of online trading. You can buy and sell stocks with the click of a mouse.....it's almost like a video or computer game for some people. Your analogy to gambling is spot on. This despite all the academic research showing that short term trading is hazardous to one's wealth.

    Of course, people have the right to play with their money as they wish. People have different personalities and investing styles. Thanks for your comments.
  • DaVinciCodeDaVinciCode Member PExer
    "Short-term mentality" is not exactly a bad thing. We often hear criticisms on short-term mentality from people who are in for the long-term haul. We just have to understand that this "mentality" is just a difference of opinion and personality.

    A lot of people want to enjoy their wealth while they are young. Others want to enjoy their wealth when they are in their retirement homes. Some people are short-term traders because they are nervous. Other people don't care about a long-term bear market. It's just a personal preference. You cannot fault one over the other.

    And besides, we are not exactly privy to other people's "overall" investment portfolio. We only speculate that they made the "wrong decision", and then justify that we are correct when we finally learned how the market performed days later.
  • tekton12tekton12 Member PExer
    Short-term mentality" is not exactly a bad thing. We often hear criticisms on short-term mentality from people who are in for the long-term haul. We just have to understand that this "mentality" is just a difference of opinion and personality.

    You are correct to say that different people have different personalities/mentalities and investing styles. But just because this is true doesn't mean that all investing styles are equally effective. If that were the case, then we'd all be rich.

    The overwhelming evidence from academic research shows that short term trading does not work for majority of investors. 80% will lose money. Here's a citation of published studies from the University of California (Davis) and other institutions supporting this view: http://faculty.haas.berkeley.edu/odean/Current%20Research.htm

    Even institutional investors have a hard time in consistently making rapid profitable trades in the stock market. Many a hedge fund and mutual fund have blown up for this reason. How much more for the little guy making trades in front of his computer at home without the help of a team of research analysts to support him? The deck is stacked against the little guy.

    But all is not lost. A strategy that actually works (i.e. makes you rich) is known as indexing. Instead of rapid fire trading of individual stocks, the investor is better served by just buying the entire stock index, and letting the Darwinian process of selecting market winners and losers take its course. The smart money invests this way. Nobel prize winners like Myron Scholes and Robert Merton entrust their money in index funds. Eugene Fama of the University of Chicago and father of Efficient Market Theory invests this way. David Swensen of Yale does the same thing. These are very rich people who understand finance and economics deeply. Please check out http://www.indexfunds.com for more information on this.
    A lot of people want to enjoy their wealth while they are young. Others want to enjoy their wealth when they are in their retirement homes.

    You can be a long term investor AND still enjoy your money while you are young. You don't have to deprive yourself in your youth and wait for retirement to reap the benefits of what you sowed. Stocks throw off dividends that can be used for current consumption. People don't have to sell their stocks and realize capitalize gains. They can obtain a continuous income stream from dividends. Certain sectors like utilities and REITs have high dividend yields (5 to 7% historically). Bonds also provide consistent interest income. The idea is to construct a portfolio that one is comfortable with....a portfolio that does not have to be revised every minute in response to short term events in the stock market. Otherwise, you'll be staring in front of your computer the whole day while life passes you by.
  • baboyakobaboyako Member PExer
    the debate between emt and active trading is still alive.
  • yajlumanyajluman Member PExer
    tekton12 wrote: »
    The overwhelming evidence from academic research shows that short term trading does not work for majority of investors. 80% will lose money. Here's a citation of published studies from the University of California (Davis) and other institutions supporting this view: http://faculty.haas.berkeley.edu/odean/Current%20Research.htm

    Sa totoo lang!

    To quote your source...."These investors trade excessively in the sense that their returns re, on average, reduced through trading. Even after eliminating most trades that might be motivated by liquidity demands, taxloss selling, portfolio rebalancing, or a move to lower-risk securities, [frequent] trading still lowers returns."

    My younger male siblings found this out the hard way. While trading stocks frequently within our own respective Roth IRAs, they initially had great performances only to find out, in the long run, that their annualized (ten year period) returns were below par compared to my simple "buy and hold" Nicor (symbol: GAS) and Vanguard MFs.
    You can be a long term investor AND still enjoy your money while you are young. You don't have to deprive yourself in your youth and wait for retirement to reap the benefits of what you sowed. Stocks throw off dividends that can be used for current consumption. People don't have to sell their stocks and realize capitalize gains. They can obtain a continuous income stream from dividends. Certain sectors like utilities and REITs have high dividend yields (5 to 7% historically). Bonds also provide consistent interest income. The idea is to construct a portfolio that one is comfortable with....a portfolio that does not have to be revised every minute in response to short term events in the stock market. Otherwise, you'll be staring in front of your computer the whole day while life passes you by.

    ..or better yet, have the dividends re-invested and let your portfolio grow via the time-tested power of compounding.

    Tekton12, Thanks for the links and your very informative replies! *okay*
  • tekton12tekton12 Member PExer
    My younger male siblings found this out the hard way. While trading stocks frequently within our own respective Roth IRAs, they initially had great performances only to find out, in the long run, that their annualized (ten year period) returns were below par compared to my simple "buy and hold" Nicor (symbol: GAS) and Vanguard MFs.

    I can sympathize with your experience. During a bull market, the trend of stock prices is to go up. It almost doesn't matter which stocks you pick, they will gain. A lot of active investors/ traders are fooled by this, and when they see their stocks doubling in one day, they think their stock-picking skills are so good. In reality, it is the entire market that moved up, bringing their stock picks along for the ride.

    The UC Davis research that I cited is really eye-opening, isn't it? Active trading doesn't work. After accounting for expenses and taxes, the majority of active traders will lag the stock indexes. And we haven't even talked about risk-adjusted returns and Sharpe ratios. Most active traders take inordinate risks for which they are not even compensated.
    Tekton12, Thanks for the links and your very informative replies!

    You're welcome.
  • tekton12tekton12 Member PExer
    Had a strong rally yesterday on Wall Street. The major indices are now up about 5% year-to-date, 16% annualized. That's very strong performance. I'm still wondering what would have happened if I sold my shares on Feb 28 when the market tanked; I would have locked in my losses forever and missed the subsequent rally. Not only that, but I would have had to pay commissions to the broker for the privilege of losing money.

    Most investors are better off using a buy-and-hold strategy of a diversified portfolio. Market-timing doesn't really work. It only makes brokers rich. Even if a bear market were to hit us (and it will), market-timing is no guarantee that you can time your moves correctly to benefit from it. The antidote to a bear market has always been prudent asset allocation: pick asset classes that are not correlated with each other so that if one class zigs, the others will zag. Don't put all your eggs in one basket. The net result will be a smooth performance.

    Investing books that people may find helpful in constructing a rational portfolio are:

    1. Common Sense on Mutual Funds by John Bogle
    2. The Four Pillars of Investing by William Bernstein
    3. The Intelligent Asset Allocator by William Bernstein
    4. All About Asset Allocation by Rick Ferri
    5. Unconventional Success by David Swensen
  • bulakenobulakeno Hollywood fan PExer
    ^^ "Most investors are better off using a buy-and-hold strategy of a diversified portfolio. Market-timing doesn't really work."

    I agree!

    "Investing books that people may find helpful in constructing a rational portfolio are:

    1. Common Sense on Mutual Funds by John Bogle
    2. The Four Pillars of Investing by William Bernstein
    3. The Intelligent Asset Allocator by William Bernstein
    4. All About Asset Allocation by Rick Ferri
    5. Unconventional Success by David Swensen"

    TY for the above reading recos!
  • DaVinciCodeDaVinciCode Member PExer
    There is really no debate in trying to convince the point that a long term stock investor will earn more money than a short term stock trader.

    When a person BUYS stocks, we must classify his motive or goal in earning profits in the stock market. We cannot always presume that the goal of short-term traders is to accumulate a mountain of cash as much as possible. Naturally, the long-term investor will laugh at his trading style and will be tempted to compare his own profits with that of the short term trader.

    There is a vast library of reasons why people do short-term stock trading. We cannot always presume that they do not know what they are doing. Perhaps the newbies are still learning, but you cannot say that the hundreds upon thousands of people who do short-term trading are all newbies too. Many people also do short-term stock trading for a living as well.

    It is wrong to conclude that people who trade/invest in stocks are doing so for wealth accumulation only. Stock buying-and-selling is not always a story about who earned that largest amount of cash in the long haul.
  • DaVinciCodeDaVinciCode Member PExer
    Stock trading is a form of calculated gambling. You have more chances of winning in short-term trading in the stock market than spending an entire night betting your money in a Las Vegas casino.

    And besides, you never really lose your entire money in the stock market unless you are stupid enough to ride the nosediving bear all the way to the ground. But if you lose in a casino, you go home broke the same day.

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