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Risks of Buy and Hold Strategy - myStocks: Opinion and Commentary

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Risks of Buy and Hold Strategy

By Rufus Mwanyasi (myStocks Contributors)
Comments Wednesday, May 13, 2015 at 9:59 AM EAT

Sometimes having an active buying strategy is better than buying and holding. The underlying reasoning is quite straightforward: you have no assurance that the stock or the market will actually give you reasonable returns over the long term. As such, the best that you can do is realise that equity partnerships tend to be quite profitable in the long-term if complemented by an investing strategy and keeping this dependable mind-set throughout your investing career.

Consider averages of the investment period dating back to 1999. Over 17 years equity investors earned a yearly average of 3.27%. During this period, 5-year rolling returns showed no returns above 10% (commonly used benchmark return for long-term stock investments) except in the periods ending in 2005 and 2006. Even with these outperforming years, someone might argue as representing periods of irrational exuberance.10-year rolling returns had only the period ending in 2010 with a return above 10%.Think about that. Buy-and-hold fell flat on its face. Obviously, no investor would want such low returns.

YearChange in Index (December)% Annual Return (Ex Div)Value of KES 1 in 1999-20145 Year Annualised Return10 year Annualised Return
19992,303-22.25%0.78  
20001,913-16.93%0.65  
20011,355-29.17%0.46  
20021,3630.59%0.46  
20032,738100.88%0.923.52% 
20042,9467.60%0.999.02% 
20053,97334.86%1.3424.00% 
20065,64542.08%1.9132.87% 
20075,445-3.54%1.8414.74% 
20083,521-35.34%1.193.63%4.34%
20093,247-7.78%1.10-3.96%5.43%
20104,43336.53%1.50-4.72%12.58%
20113,205-27.70%1.08-10.06%8.93%
20124,13328.95%1.403.26%4.20%
20134,92719.21%1.668.70%5.28%
20145,1223.95%1.732.93%2.57%

Whereas wealth generation is not everyone's focus, for the majority it is. Investors are better appreciating that the true riskiness of an investment is not entirely measured by beta, but rather by passivity of an investment strategy that causes its owner a loss of purchasing power over his/her contemplated holding period. In other words, investors are better off taking advantage of beta risk (price fluctuations) to ‘’buy low-and-sell high’’ in order to deliver increasing purchasing power over their holding period as opposed to ‘’buying-and-holding’’.

The takeaway is simple; since the basic game of ‘’passive investing’’ is so unfavorable, I believe, it’s a terrible mistake to try to continue down this path. The risks of not meeting your investment targets are huge. You are be best served choosing an active strategy that is suitable for your investment needs and apply it consistently and compounding will make up for the many ‘’valuation missteps’’ while simultaneously providing reasonable results.

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