Tag: investing strategy

  • Traps of Buy and Hold Strategy In Investing

    Traps of Buy and Hold Strategy In Investing

    Traps of Buy and Hold Strategy In Investing
    In the long run, buy and hold strategy is less costly than other more active strategies but has some traps also.

    Some may ask how are possible traps of buy and hold strategy? So many investors have this approach in investing and see this strategy as the best and safest one. But recently, due to the coronavirus pandemic that caused, and still has influence, on the stock markets over the globe, as well as on the overall economy, we can hear different sounds. Lately, some investors propose some other strategies and marked some traps of buy and hold strategy in investing. 

    News of the end of the “buy and hold” strategy in investing was blooming. But, those sounds are also greatly magnified. Saying that this strategy isn’t able to survive the last market downturn is nonsense, at least. The truth is that this strategy is able to survive any market condition. This pandemic environment cannot decrease the importance of this strategy. 

    But is the buy and hold strategy perfect, is it possible that it has some traps, downfalls, pitfalls? That is exactly what we would like to point out. Also, it is important to notice that the majority of traps of buy and hold strategy are developed from investors’ behavior. They became more worried about their investments, which is normal in the situation when we have had a great market decline. But this strategy is still relevant and it will be despite some traps it has.

    Traps of Buy and Hold Strategy

    Trap 1: Buy and Forget 

    This is the first of many traps of buy and hold strategy in investing.

    Managing your portfolio is a must. Long-term investing doesn’t mean that you can neglect the importance of developments and adjustments, if necessary, in your portfolio. We all know that famous Buffet likes to keep the investment for a long time, but do you think he never looks at his portfolio? It’s 100% opposite. He, and many other investors who do care about capital invested, are fully informed of each of their holdings. So, as you can see, one of the traps of buy and hold strategy is the approach to this investing expressed in the mantra “buy and forget”. 

    You simply have to keep your eyes on your portfolio. It is very important to check if the company you bought is really the right one. Times are changing, management is changing, the trend is changing, and since literally everything and anything may affect your holdings, it is smart to stay fully tuned on your investment. 

    For example, let’s say you bought the shares of stock in some company that looked pretty good but suddenly you reveal that it wasn’t such a good pick. What are you going to do? Will you keep holding that stock? Why not, your strategy was the buy and hold? See how you can jump into the trap very easily? If you bought the wrong company even at a low price, the buy and hold strategy is a stupid move. 

    What if you were smart and purchased the right company but the price was wrong? Do you still think you did a good job? Of course not. So, you should never even try the buy and forget strategy because it is a losing strategy. And also, one of the traps of the buy and hold strategy.

    Trap 2: The simplicity of buy what you know

    It is a nice mantra, seducing like a poem, but that level of simplicity can be very dangerous. Why is simplicity one of the traps of buy and hold strategy in investing? To make this clear, do you hold stocks of the company whose products you use in everyday life? Yes? Look, there is nothing wrong, you can like the company’s product because of its quality, design, smell, whatever. However, it is unreasonable as a criterion when it comes to picking the stock for long-term investing. The meaning of buy what you know is something else. You don’t need to buy Disney’s coats or sleepwear if you want to buy the shares of the company. 

    Investing is a very serious job, so when you choose stocks some other things you’ll need to know before buying them. For example, what is the company’s prospect, how the company is positioned among competitors, is the stock fair valued, etc. 

    Some studies unveiled that inexperienced investors have a disabled blind spot when they estimate what they know and what not in the sense of picking the stocks. Remember, stocks are not your lover. You don’t need to love them. Keep that love in your private life. But when you estimate and evaluate the stocks you’ll need your rational mind. Free of feelings and emotions. It’s simple. When you are choosing the stocks where you’re gonna put your hard-earned money, the emotions are a burden and could lead you to the wrong and harmful decisions.

    Trap 3: Stay to your investment plan

    Of course, it is a good decision and you have to do that but not always. We said that numerous times: Stick to your plan! Yes, but only if you hold well-evaluated stocks in your portfolio. If you have a portfolio filled with stocks you “love” and you picked them randomly, you’ll have to change your plan and your portfolio. What else can you do? Nothing. You can do nothing with wrongly chosen stocks. Why would you like to hold stocks with poor performances? And there is a great chance that you picked losers if you didn’t build your portfolio based on investment outlook. So, how to stay with your plan if you have losers? The only reasonable action is to improve your investment portfolio. You have to change your holdings, and you’ll need to be more realistic when picking the stock. 

    Don’t be afraid! You don’t need a detailed and exact outlook for growth in the next year. But you surely need to have a basic understanding of the economy and the market.

    For example, the whole world has an economic downturn today. The fears of many companies regarding solvency are rising. But this situation is likely not to continue. Actually, we are 100 percent sure it will not. The economy will bounce back soon or later, there is no doubt. And you as an investor also have to know that. 

    To put it simply, if you have a long investment horizon, why should you be worried if prompt recovery or a slow recovery will come. Your only concern should be your ability to be clever enough and to be prepared to adjust your position if your investment outlook has to change.

    If you stick to your investment plan and you do not manage your investments with due diligence, you’ll be faced with traps of buy and hold strategy in investing. 

    Trap 4: The money is locked

    Despite the fact that it looks like a great strategy, the “buy and hold” strategy has some traps and drawbacks. First of all, this strategy means investing for the long run, so your money invested will be locked in stocks. During the holdings period, it might happen that you’ll have to stay away from other investment opportunities. It will be hard for all of the investors to have such discipline, particularly if they made bad purchasing and choose lagging stocks. Especially today when many investors realize that their choice wasn’t that good.

    Trap 5: Time is my friend

    Well, it can be true especially if we count on compounding. But just because you owned the stock for 15 years, does not mean that you are qualified for a generous reward for your capital invested. Just look at the differences in return between your stocks. If your portfolio includes a few great investments, over time it can be dragged down by the losers. Of course, what or who can stop you from holding all losers in your portfolio. That’s your choice. But think about diversification or buying some index funds. We hope you understand that time isn’t always your friend and that your investments may drop over time. There are no guarantees unless you keep your eye on your investing, manage your portfolio, adjust it is necessary, or engage some to handle it. But yet, nothing is 100 percent sure when it comes to long-term investing. You should count on it. And try to avoid traps of buy and hold strategy because it has them many.

    Trap 6: My best players will always beat the market

    Really? What if the market crashes? Despite the fact that the markets will survive even an Armageddon, the market crashes can lessen the value of your investment significantly. For example, if a prolonged bear market occurs, investors stick to the buy and hold strategy and can lose all gains. Yes, your winners are solid stocks and they may bounce back, but if you own the stocks that are notably going down, your portfolio will be hurt a lot. That kind of stock could wipe out your portfolio. Think about the oil sector today. What do you think, will it be better? Of course, but the damage is done.

    If you prefer the buy and hold strategy it doesn’t mean that you’ll never need a risk management strategy in place. Every single investor or trader must know when to pull the plug and avoid bigger losses. 

    Bottom line

    Buy and hold strategy in investing is one of the most popular ways to invest in the stock market. In most cases, investors who practice this strategy have no worries. But, if we say it has no drawbacks we’ll lie. Moreover, this strategy has some serious traps and failures. If you pay enough attention to your portfolio it is possible to avoid them. That will require your time and money to secure your investment against market crashes. Also, you have to know how and when to cut your losses and take profits.

  • Stock Market Bottom And How To Recognize It

    Stock Market Bottom And How To Recognize It

    Stock Market Bottom And How To Recognize It
    Nobody can with certainty predict a stock market bottom. Still, it’s worth at least thinking about different entry points to let your money work for you.

    By Guy Avtalyon

    The questions for the past several weeks mainly were all about the stock market bottom. Did the stock market hit the bottom? Will the stock prices stop dropping? Have stocks reached support levels? When will prices stop falling? 

    Stock traders have so many questions these days and weeks. But do they really know where to look? 

    Maybe one of the most terrifying jobs related to investing is about the stock market bottom and how to recognize it. The idea to predict when a given stock will hit the bottom is old as much as investing and trading. The point is to recognize the point where the stock will no longer drop. The rule of thumb is: buy low, sell high. The problem arises when we have some unpredictable events in the market such as this one, coronavirus pandemic. That has an influence on the global economy, almost all economic and political events, and decisions. So, with a high level of certainty, we can say finding the stock market bottom can be a discouraging job.

    Well, this kind of question traders ask almost every day but are they looking in the right place to find the answer? For example, investors are looking at Dow Jones. Is it the right place? We are afraid that the value of DJIA isn’t able to alarm you when the stock market hits the bottom. Okay, it will tell you but after it happened. 

    So what to do? 

    How to recognize the stock market bottom? 

    If you want to find it, you’ll need some indicators. Indicators can tell you when is the stock market going to hit a bottom but also when it is going to recover. By using indicators you’ll not miss the beginning of the wave. When buying a stock you want to do so at the lowest possible price but you wouldn’t like to hold falling stocks. You would like them to start rising after you bought them, right? That’s why it is so important to recognize the stock market bottom. The point where the stock can find support.

    That knowledge can give you huge profits and prevent huge losses. So, how can we know with certainty that a stock has touched a low point? To be honest, no one can do that with 100% certainty and consistency, but traders and investors have some tools, fundamental and technical trends, and indicators. They arise in stocks when they are about to tap the bottom.

    The indicators of stock market bottoms

    Some indicators can help us determine when the stock market is going to form a bottom. What we really need to have are indicators of the health of a global economy and what the main participants in the market are doing with their money. But keep in mind, there is no such thing as a magic indicator to identify a stock market bottom. We have to look at several indicators to have an idea of the economy’s and stock market’s health.

    Second, we have to look at history because it will tell us that the average bear market persists about 17 months. Also, it corrects around 35% from the maximum. But keep in mind that you cannot find the two bear markets alike 100%. All we can do is to suppose that the next will be similar. 

    Further, we have to understand the valuation. For example, the S&P 500 has a P/E ratio and earnings. The P/E ratio will move up and down depending on the market period. It will be up when we have good earnings growth, all ratios including the P/E ratio will go up. But when the circumstances are changed, with rising pessimism the valuation is likely to go down. 

    For example, when the S&P Index was above 2.500 the P/E ratio was at 19.

    Also, the higher the VIX is, the chances for the stock market to hit the bottom are growing. These first two days in April this year, VIX traded between 54 and 57. If we take a look at historical data we can see that in 2008, the VIX was somewhere between 70 and 95. During the March this year, VIX traded over 75.

    Other indicators of the stock market bottom 

    The stock market fell over 25% in 3 weeks. This is the sharpest drop in history. The biggest decline occurred on March 12th, the biggest since the market crash in 1987. Many investors thought that a stock market hit a bottom. 

    If you want to recognize when the stock market bottom is, check out your emotions. Did you feel fear at that time? If yes, you were one of the millions with the same emotion. Fear was so obvious in the middle of March. To be honest, almost all were panicked.

    But we have to try to be reasonable. Just take a look at the charts and the technical levels for those days. Can you notice the major pivot? Do you notice a bottoming tail and a huge volume? 

    Okay! A major pivot, bottoming tail, and a huge volume on the same day and combined with a market 3-weeks decline of 25%, are indicators there was some at least short-term bottom.

    What to do when the stock market is near the bottom?

    The most intelligent investors started to buy those days. Small chunks, nothing big. Smart investors are doing such a thing to accumulate their full positions. The point is to buy 25% or 30% even 50% of the total position. That will keep your potential stress down and provide you an all in all a better average. But remember, don’t buy some small-cap, go for the brands. 

    Where is the market bottom now? 

    That is the most frequently asked question since coronavirus appeared. 

    Market experts like to say that it’s impossible to time the market. Well, it isn’t the truth. If we can see the market tops, why shouldn’t we see the market bottoms? Institutional investors know that. Follow what they are doing. Their actions could be the key bottoming signal. Follow-through has been noticed at almost every stock market bottom. This signal is extremely important because it can provide you profits when the early stages of a new market uptrend is confirmed.

    The quest for a stock market bottom

    This signal works quite simply. When there is a sustained stock market downturn, the first rising day from the index low is most important. That could be the beginning of a rally attempt. No matter which index you are using S&P 500, Dow Jones or Nasdaq. 

    According to some experts, the gain expressed in percentages isn’t important at this point. Also, don’t pay attention to the trading volume. What you have to look at is a down session and the moment when the index bounces after a great drop and closes close to session highs. Some experts deem that closing in the top half of the day’s trading range is adequate also.

    Further, find a bigger percentage gain in higher volume than the prior session several days in the rally attempt. This time period is making it possible for short covering to resolve and for a rally attempt to gain ground. The rally will be halted in place only if the index reaches a new low.

    How will the market react after the pandemic?

    It is good if the market supports the new buyings, but if it doesn’t, just be patient. Sometimes, breakouts are visible on the charts after a few weeks. This market crash caused by the coronavirus outbreak has a large supply of stocks making the new base. But a lot of them have yet to bottom.

    If an index suffers a decline in higher volume shortly after the follow-through day, the signal will fail in most cases. If close below the low of the follow-through day, it is almost the same. It is more the sign to start selling the stocks you bought recently.

    These signals don’t mean you should rashly jump into the market since they tend to fail after indexes have dropped clearly in a short time. That happened with the stock market correction in February. The more suitable is to buy a few stocks, maybe one or two, and test how they will work. If there is a real uptrend your stocks will rise.

    Every investor wants to know when trends are going to make a significant change. Will they reach tops or bottoms. The truth is no one knows that for sure. Only the big volume spikes, and staying stick to the chosen sector, will give you some clue if the stock has reached the lowest level from which it will not decline more. We pointed just one of the numerous scenarios. There are many others. 

  • The Stock Market prediction Is Possible or Not?

    The Stock Market prediction Is Possible or Not?

    The Stock Market prediction Is Possible or Not?
    Everyone would like to know everything about this

    By Guy Avtalyon

    Stock market prediction is the intention since the beginning of the stock market. The reason is clear. Every single participant in the stock market aims to gain huge or decent returns and to avoid losses. Sounds logical, indeed. In early days traders and investors were just guessing, to say it simply. Well, frankly, not just guessing. There were some estimations, judgments, listening to the rumors, asking. But today, traders and investors may employ different tools, machine learnings, and AIs to help them in stock market predictions. 

    Is the stock market prediction possible or not? 

    We already learn that past performances can’t show future trends. But is this truth 100%?

    Of course not.

    Watching past performances can help you with a high level of certainty to predict how some stock will act in the future. This is very important because based on that data you will determine and decide what to do with some stocks. Would you buy or sell, would you stay on position or leave.

    The modern stock market prediction is often based on machine learnings and AI technologies varying from very simple to complex ones. Those stock market prediction tools or techniques, whatever would you like to call them may help you a lot to secure your investments. Even the simplest can give you an insight into the future stock market trends. 

    Using robust algorithms has benefits, of course. But not every trader or investor can afford them. Some are very expensive and the result is very often almost the same if you use the simple version or some simple tool.  

    The crucial thing about stock market prediction is to have quite enough historical data to be able to make a conclusion, to have a basic sense of some stock’s nature.

    How to predict the stock market movements?

    The relationship between supply and demand is what dictates the stock price. And this works very simply. If there is in the market more sellers, that means the supply is greater than demand, so the price will decrease. And vice versa. That is the easy part of the stock market. Things become more complicated when you try to understand why some investors like one stock more than the other. But that is another question. We want to know is the stock market prediction possible or not.

    The algos, tools, learning machines deliver their predictions based on historical data. This means that all of them show the prior values of some stock and based on that give the future estimation of stock price action. 

     

    And that is exactly what you need as an investor. To get some info with the highest level of possibility on how some stock will perform in the future. To have that kind of info you don’t need to spend a fortune. Some simple tools may benefit you too. Such a tool must have historical data about prior performances, for some limited time, for example during one year. Based on that info you will be able to check your trading or investing strategy. And that is crucial. The possibility to check your strategy on your own and not to put all in the “hands” of some algorithm, because we want to be honest with you, algos can make fails. Algos, as like your trading strategy, depends on inputs that some other implemented in it. To say simpler, it is based on other people’s knowledge about the stock market prediction and investor expectations.

    Le’s check one example. Let’s say you have a strategy and you want to check how it works on a particular stock.

    How efficient your strategy is?

    If it shows your strategy isn’t good you can easily change the strategy or test it on some other stock. Moreover, the possibility to test different strategies on numerous stocks is extremely important when it comes to choosing the stock to invest in or strategy to employ. What is the main point of trading? To gain a nice return. And how to provide that? You have to find the best possible to take a profit point and stop-loss point.  

    Based on the info you can obtain from such a tool you can easily decide about your future trading. 

    Very simple and very helpful, don’t you think? 

    What Traders-Paradise wants to say is just stay tuned.

  • Trading Or Investing – What’s Better Strategy?

    Trading Or Investing – What’s Better Strategy?


    Understand the differences between trading and investing to be able to choose your strategy for approaching the stock market

    By Guy Avtalyon

    Trading or investing? Actually they are two very different strategies of trying to profit in the financial markets. The goal of investing is to continuously build wealth over a long time through the buying and holding of a portfolio of stocks, mutual funds, bonds, and other investment products.
    Investors usually increase their profits through compounding or reinvesting any profits and dividends into new stocks

    Trading versus Investing

    Investments are usually kept for years, sometimes even decades. There are many advantages to investing for a long time, for example, interest, dividends, can give profits also. Investors are more concerned with market fundamentals, such as price/earnings ratios and management predictions.

    On the other hand, trading involves the more frequent buying and selling of stock, commodities, currency pairs, or other, with the goal of generating returns that outperform buy-and-hold investing. Trading profits are generated by buying at a lower price and selling at a higher price within a short period of time. But, trading profits are made also by selling at a higher price and buying to cover at a lower price (known as “selling short”) to profit in falling markets.

    For traders, the stock price action is more important. If the selling price goes up, they will usually want to sell the stocks they hold. Trading is more the art of right timing while investing is the ability to create wealth by increasing interest, plus dividends over the years. Investors’goal is to keep excellent stocks in the market. Trading will give you a chance to profit on short-term market movements.

    Investing means to hold stocks for a longer time, longer than 5 years, for example. But some investors hold their excellent stocks for decades and sometimes they are the part of the inheritance.

    Stock investor versus stock trader

    Stock traders and stock investors approach the stock market with the same objective but use different modus operandi. But stock investor tries to achieve this through a single transaction, whereas the stock trader chooses multiple transactions but in quick succession. The stock investor just buys and holds while the stock trader buys and sells stocks on a continuous basis.

    Select stocks for investment

    Stock investors are very patient and have the tendency to hold stocks until the market realizes their actual worth.

    Stock traders are simply concerned about the price movement and they are ready to buy an overvalued stock if the price movement suggests so. They are least worried about the valuation of the stock.

    Trading tools for trading and investing

    Stock investors rely on fundamental analysis for identifying investment avenues. They utilize top-down and bottoms-up approach together with ratio analysis for stock selection.

    Stock traders employ technical analysis to maximize their returns. They are concerned about past and current price movements.

    Different market niche

    Stock investors pay more attention to taking dividends payments while traders never or rarely pay attention to dividends. This limitation makes the derivative market more suitable for traders and the cash market for investors.

    Why you have to know all of this?

    You have to know, to recognize, your own psychology before entering the market. To find which of this technique suits you better. Identifying your personality will enable you to employ the right tools and techniques to be a winner.

    If you are comfy with speculation, be a trader, and if you are a hunker, choose to be an investor.