«In the time while the market is experiencing a downslide, the question ‘to sell or not to sell’ often appears on investors’ agenda. When answering this question, it is important to keep in mind that investment is a long-term process – investments need time to start making profits,» – explains Nordea Bank’s Head of Investments in Latvia Anzelika Dobrovolska.
«It is simple to follow this principle if the market shows positive development tendencies. The first hardships appear when the market experiences a decline. Financial consultants recommend sticking with initial investment plans and maintaining investments in spite of price fluctuations. Often, however, it seems that waiting during periods of market decline can provide better returns than ‘buy and wait’ strategy,» – said the bank’s representative.
«There is no doubt that if someone could accurately predict the beginning of the market’s correction and act accordingly, it would bring that person incredibly good profitability indicators. However, an analysis of historical yield performance of professional asset management reveals that there are few people who can accurately predict market corrections. And those few who manage to exceed results of the ‘buy and wait’ strategy are more often than not unable to repeat that success. For example, according to observations of Hulbert Financial Digest, 20 of the most successful investors known as ‘the best price takers on the market’, who managed to achieve the best results in buy and wait strategy in 2000-2007, did not show any successful results in the 2007-2009 period – during the massive market decline period.
Considering all this, there is no reason to expect private investors to demonstrate better market prediction capabilities. Investment specialists have come to the conclusion that private investors who wish to set better market prices require a strategy that does not need a lot of involvement and is relatively simple to realize. On average, investors’ risk tolerance is limited with 10% portfolio drop. With that, the strategy we have decided to employ is the following: sell investments once prices have declined 10% or more from the recent maximum level, or buy once prices have risen 10% or more from the recent minimum. This simple strategy should theoretically help investors avoid big market drops and earn revenue from market growth,» – as explained by the specialist.
This strategy was analysed based on monthly global stock index data from the period of 31 December 1969 – 31 August 2015.
In general, throughout the entire period, which spans approximately 46 years, the simple ‘buy and wait’ strategy secured 1,529.1% of cumulative yield, which is 6.2% of average annual yield. The strategy analysed by Nordea exports, even without commission fees, has shown worse results – 1,312.1% cumulative yield, or 5.9% average annual yield. Inclusion of commission fees in the analysis of buying and selling financial instruments would have shown a more significant difference, because active trade strategy secures only 893.3% of yield, or 5.1% of average annual yield.
In order to check if this result is similar to other investment periods, the bank analysed 10, 15 and 20-year periods using the same data. Results show that the ‘buy and wait’ strategy provides better results than active trading strategy in 70% of cases. Average yield of ‘buy and wait’ strategy in comparison with active trading strategy is as follows: 8.8% and 6.7% respectively in 10-year period; 8.7% and 6.4% in 15-year period and 8.6% and 6.3% respectively in a 20-year period.
Considering all of the above, the ‘buy and wait’ strategy seems like the most optimal choice for private investors. An investor’s main objective is to create a diversified investment portfolio that is well-adapted to the investor’s risk tolerance.