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08-11-2011, 06:50 PM
Business Times - 08 Nov 2011
Not yet time to write off 'buy and hold'
Exercise discipline in rebalancing; take up tactical investing, say investment pros
By EMILYN YAP
THE buy-and-hold investment strategy has been under attack lately as stock markets lurch from peak to trough and back again in a matter of weeks.
And yet, investment professionals have refrained from writing off an approach which was once seen as the most logical way to build wealth. Buy-and-hold is not dead, but thinking that it works on its own and allows an investor to take his eyes off the market is, they say.
'A naive buy-and-hold strategy does not guarantee success,' says assistant professor of finance at Insead Xi Dong. 'A timing strategy cannot either and may even be harder to guarantee so in the long run.'
The idea of investing for the long term gained popularity on the premise that markets were efficient and would give good returns in the long run despite periods of volatility.
If all stocks were fairly valued, active trading would only generate fees without improving returns.
But the post-global financial crisis stock market has seen sharp dips and spikes and the last few months have been particularly discouraging for buy-and-hold believers.
The deepening debt crisis in Europe and recessionary threat in the US rocked equity markets, with the Straits Times Index almost back to where it was at end-2009 when it closed last Friday.
Because of significant market uncertainties, there is an 'increasing tendency for investors to mainly focus on the more near term investment horizon rather than looking to very long term investment prospects', says Fan Cheuk Wan, managing director and head of Asia Pacific research at Credit Suisse's private banking division.
Some investors chose to liquidate their holdings. Societe Generale Private Banking Asia Pacific regional head of asset allocation David Poh observes that clients were quick to switch to cash when markets started to turn, and macroeconomic risks have kept them from investing.
'In that sense, the idea was only a hold strategy - hold on to cash,' he says.
Recent months have instead, thrown up a wealth of opportunities for punters.
Someone who bought into, say, CapitaLand at $2.41 a share on Oct 20 would have reaped a quick profit by selling at $2.73 last Friday.
The trick is that no one can time the market perfectly. Traders facing a deluge of information daily, whether from media reports or other sources, may also get sidetracked.
'A buy-and-holder is not affected too much by such issues because they ignore the short term volatility,' Prof Dong says.
'An active trader may on the other hand trade and overreact on noises a lot of the time and therefore may even underperform because they need to pay higher transaction costs.'
To invest for the long run in a volatile environment will require greater discipline. 'Buy-and-hold does not mean never rebalance,' says Prof Dong, pointing out that investors should use the latest information to assess if their holdings still have long term value.
'If yes, then just stick to the original belief without worrying too much about the short term volatility. If not, then one needs to cut loss because everyone can make mistakes, and it is often likely that judgment based on more up-to-date information is more accurate than older information.'
SocGen's Mr Poh believes trading in today's volatile environment is not advisable, 'unless one is tuned to the latest developments and has a good sense in timing the markets'.
He suggests instead, that investors accumulate good quality stocks, some of which are priced at huge discounts to their intrinsic values.
For those who find the volatility too good to miss, there is the option of complementing a buy-and-hold strategy with some tactical investing.
At Credit Suisse, strategic clients maintain a core portfolio based on medium term fundamentals, but also have a satellite portfolio to capture trading opportunities based on a one to six month horizon, says Ms Fan.
And there have been tactical opportunities for investing because of the sharp correction of the market, says Manulife Asset Management Singapore's head of equities Amy Low, whose firm uses fundamental analysis. With this approach, the focus is not simply on the long run or short run, but on when a stock's price reaches its estimated fair value.
Not yet time to write off 'buy and hold'
Exercise discipline in rebalancing; take up tactical investing, say investment pros
By EMILYN YAP
THE buy-and-hold investment strategy has been under attack lately as stock markets lurch from peak to trough and back again in a matter of weeks.
And yet, investment professionals have refrained from writing off an approach which was once seen as the most logical way to build wealth. Buy-and-hold is not dead, but thinking that it works on its own and allows an investor to take his eyes off the market is, they say.
'A naive buy-and-hold strategy does not guarantee success,' says assistant professor of finance at Insead Xi Dong. 'A timing strategy cannot either and may even be harder to guarantee so in the long run.'
The idea of investing for the long term gained popularity on the premise that markets were efficient and would give good returns in the long run despite periods of volatility.
If all stocks were fairly valued, active trading would only generate fees without improving returns.
But the post-global financial crisis stock market has seen sharp dips and spikes and the last few months have been particularly discouraging for buy-and-hold believers.
The deepening debt crisis in Europe and recessionary threat in the US rocked equity markets, with the Straits Times Index almost back to where it was at end-2009 when it closed last Friday.
Because of significant market uncertainties, there is an 'increasing tendency for investors to mainly focus on the more near term investment horizon rather than looking to very long term investment prospects', says Fan Cheuk Wan, managing director and head of Asia Pacific research at Credit Suisse's private banking division.
Some investors chose to liquidate their holdings. Societe Generale Private Banking Asia Pacific regional head of asset allocation David Poh observes that clients were quick to switch to cash when markets started to turn, and macroeconomic risks have kept them from investing.
'In that sense, the idea was only a hold strategy - hold on to cash,' he says.
Recent months have instead, thrown up a wealth of opportunities for punters.
Someone who bought into, say, CapitaLand at $2.41 a share on Oct 20 would have reaped a quick profit by selling at $2.73 last Friday.
The trick is that no one can time the market perfectly. Traders facing a deluge of information daily, whether from media reports or other sources, may also get sidetracked.
'A buy-and-holder is not affected too much by such issues because they ignore the short term volatility,' Prof Dong says.
'An active trader may on the other hand trade and overreact on noises a lot of the time and therefore may even underperform because they need to pay higher transaction costs.'
To invest for the long run in a volatile environment will require greater discipline. 'Buy-and-hold does not mean never rebalance,' says Prof Dong, pointing out that investors should use the latest information to assess if their holdings still have long term value.
'If yes, then just stick to the original belief without worrying too much about the short term volatility. If not, then one needs to cut loss because everyone can make mistakes, and it is often likely that judgment based on more up-to-date information is more accurate than older information.'
SocGen's Mr Poh believes trading in today's volatile environment is not advisable, 'unless one is tuned to the latest developments and has a good sense in timing the markets'.
He suggests instead, that investors accumulate good quality stocks, some of which are priced at huge discounts to their intrinsic values.
For those who find the volatility too good to miss, there is the option of complementing a buy-and-hold strategy with some tactical investing.
At Credit Suisse, strategic clients maintain a core portfolio based on medium term fundamentals, but also have a satellite portfolio to capture trading opportunities based on a one to six month horizon, says Ms Fan.
And there have been tactical opportunities for investing because of the sharp correction of the market, says Manulife Asset Management Singapore's head of equities Amy Low, whose firm uses fundamental analysis. With this approach, the focus is not simply on the long run or short run, but on when a stock's price reaches its estimated fair value.
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