I am a big believer of continuous (read daily) analysis and monitoring of investments that I make or want to make. That is a good thing for me because I am not a person who is a big believer of the “buy and hold” strategy. I consider that too risky simply because it allows me to drop my guard. I feel that using the buy and hold strategy I tend to think, “I am only buying the best stocks and will hold them forever, and so I do not need to monitor them regularly”. I know that is against the strategies adopted by some very successful investors such as Warren Buffet and others.
My philosophy is that over the long run the stock market does go up, but it is not a smooth ride. There are high waves and there are low waves. If I monitor the market regularly and track these waves, I may be able to maximize my returns by picking to ride the correct waves. It is a more involved strategy, but it is also safer.
Of course, there are negatives to my strategy. One big one is taxes. My strategy involves more short term trades which incur higher taxes. (I will discuss taxes in another article). But there is a certain satisfaction in locking in gains and then going for another shot at the pot. Also, there is very less likelihood of me getting blindsided by something unforeseen or unanticipated, either within a company or within the global market scenario. There are enough examples of such cases in the current financial meltdown. I am thinking of people who were long-term investors in stocks of Lehman Brothers, Bear Stearns, etc. Even a rumor about Steve Jobs health brought down the Apple stock price by almost 10%. My strategy is to be alert for such events and take action to reduce the losses.
I do have some investments that I keep and consider long-term. These are primarily held in my retirement accounts only. But even here, I took evasive action by placing all the holdings in cash when things started to turn sour. It turned out to be a smart move but at the time I was just taking evasive action. It was all about being averse to risk. I do not want to see my whole portfolio loosing money. I did not end up being smart about getting back into the market. The market has zoomed in the last 6 months or so but that retirement portfolio is still in cash. That portfolio is my nest egg and I am going to be extra risk averse about it. I am probably not going to put it back in play for at least another year unless the economy fully turns around. I may miss out on some gains in the process but that is OK.
Some of my friends find my approach contradictory. On one hand, I am still keeping my entire retirement portfolio (in one account) out of the market. On the other hand, I take bigger risks in my short-term trades. The difference is that the bigger risks I take are with lower capital and I am playing for high rewards for the high risk that I am taking. Also, I protect my risks by staying alert and getting out fast if things do not work out like I thought it would. No emotions there about “How can I be wrong?” The first indication I get that my investment was wrong, I am out of it.
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