Trend Chart
Here is a very simple example of why you should never buy and hold.
Taking as a very simple example the FTSE 100 index over the last 5 years.
Scenario 1 – Buy and Hold.
You would have made roughly £100 for every £1,000 invested in January 2005. 10% over 5 years is pretty poor. You are definitely not going to retire early on that kind of performance!
Scenario 2 – Buy and Sell.
You only invest when the trend is up and you sit on your cash when the trend is down. Very simple signals could have told you when to get out. The 60 day moving average crossed below the 200 day moving average in January 2008 telling you to sell up. You would have converted your £1,000 to £1,330 by this stage.
You would have kept your powder dry until, in June 2009, the lines crossed in the opposite direction giving you the call to action! Investing your £1,330 in FTSE 100 tracking ETFs would have given you a grand total of £1,660 now (Dec 09). So 66% over 5 years is a bit better and, if repeated, could be the route to a more comfortable retirement.
The difference between Scenario 1 and 2 is only two transactions! One sell and one buy about 18 months apart but what a difference in performance!
Scenario 3 – Buy and Short.
Instead of sitting on your cash pile during the 18 month down-trend you invest in short ETFs. Unfortunately these were not available to retail investors in the UK in January 2008 so my example does not show the full benefit of this method. However, if you had invested in XUKS (short FTSE 100 ETF) in June 2008 (the earliest date possible) you would have caught the end of the FTSE downtrend (which, of course, equals an uptrend in XUKS). The £1,330 from your sale of the FTSE would have grown to £1,510 at the June 2009 crossover, giving you more firepower for the latest uptrend. Your £1,510 would be worth £1,890 now.
So, in summary, over 5 years your £1,000 would be worth:-
£1,100 – buy and hold
£1,660 – buy and sell
£1, 890 – buy and short
It doesn’t take expensive investment management experts to improve your investment performance dramatically. You can do this yourself using simple moving averages! It is less risky than investing and hoping.
The fallacy of buy and hold
Trend Chart
Here is a very simple example of why you should never buy and hold.
Taking as a very simple example the FTSE 100 index over the last 5 years.
Scenario 1 – Buy and Hold.
You would have made roughly £100 for every £1,000 invested in January 2005. 10% over 5 years is pretty poor. You are definitely not going to retire early on that kind of performance!
Scenario 2 – Buy and Sell.
You only invest when the trend is up and you sit on your cash when the trend is down. Very simple signals could have told you when to get out. The 60 day moving average crossed below the 200 day moving average in January 2008 telling you to sell up. You would have converted your £1,000 to £1,330 by this stage.
You would have kept your powder dry until, in June 2009, the lines crossed in the opposite direction giving you the call to action! Investing your £1,330 in FTSE 100 tracking ETFs would have given you a grand total of £1,660 now (Dec 09). So 66% over 5 years is a bit better and, if repeated, could be the route to a more comfortable retirement.
The difference between Scenario 1 and 2 is only two transactions! One sell and one buy about 18 months apart but what a difference in performance!
Scenario 3 – Buy and Short.
Instead of sitting on your cash pile during the 18 month down-trend you invest in short ETFs. Unfortunately these were not available to retail investors in the UK in January 2008 so my example does not show the full benefit of this method. However, if you had invested in XUKS (short FTSE 100 ETF) in June 2008 (the earliest date possible) you would have caught the end of the FTSE downtrend (which, of course, equals an uptrend in XUKS). The £1,330 from your sale of the FTSE would have grown to £1,510 at the June 2009 crossover, giving you more firepower for the latest uptrend. Your £1,510 would be worth £1,890 now.
So, in summary, over 5 years your £1,000 would be worth:-
£1,100 – buy and hold
£1,660 – buy and sell
£1, 890 – buy and short
It doesn’t take expensive investment management experts to improve your investment performance dramatically. You can do this yourself using simple moving averages! It is less risky than investing and hoping.