Buying and holding of stocks has been the leading and traditional "wisdom" of investment in the 20th century 90s. During that period of time, you do not need investment strategies because you would not sell your stocks. But, investors noticed the problem of such "wisdom" in 2000 to 2002 because the values of their stocks decreased by 75 percent or more.
The "buy and hold" strategy means literally as buy and hold the stock without any selling. This strategy may be suitable in some situations but obvious not all situations. As the stock market nowadays is much more complicated and fluctuated, this strategy may not be a good one if you wish to earn a profit.
In order to make a profit in an unstable and unfavorable financial market, we need to know the purpose and target of our investment. We do not aim at anticipating the market trend, but give a frame to ourselves. With this frame, we will not buy and hold stocks thoughtlessly. Instead, we follow a model in discipline when determining the buying and holding of stocks.
In this model, there are three factors that determine your decisions including market price, Federal Reserve Bank and market trend. When all the factors are favorable to you (around 26% of time from 1927), it is a good time to purchase. If two of the factors are favorable to your (around 50% of time), you are likely to have an annual return of 10.7%. If all the factors are unfavorable to you, you are likely to have an annual loss of 9.7%.
Whether the price is high or low is determined by PE ratio. With reference to the past 75 years, when average PE ratio is above 17, the market price is considered as high. Federal Reserve Bank plays an important role in interest rate. The financial market is less favorable when federal fund rate increases.
When the market price (PE ratio) is high, interest rate is increased and the market shows an upward trend, it is a signal for selling your stocks. In the contrary, when the market price (PE ratio) is low, interest rate is low and the market shows a downward trend, it is a signal for buying stocks. Otherwise, you should hold your stocks.
The "buy and hold" strategy means literally as buy and hold the stock without any selling. This strategy may be suitable in some situations but obvious not all situations. As the stock market nowadays is much more complicated and fluctuated, this strategy may not be a good one if you wish to earn a profit.
In order to make a profit in an unstable and unfavorable financial market, we need to know the purpose and target of our investment. We do not aim at anticipating the market trend, but give a frame to ourselves. With this frame, we will not buy and hold stocks thoughtlessly. Instead, we follow a model in discipline when determining the buying and holding of stocks.
In this model, there are three factors that determine your decisions including market price, Federal Reserve Bank and market trend. When all the factors are favorable to you (around 26% of time from 1927), it is a good time to purchase. If two of the factors are favorable to your (around 50% of time), you are likely to have an annual return of 10.7%. If all the factors are unfavorable to you, you are likely to have an annual loss of 9.7%.
Whether the price is high or low is determined by PE ratio. With reference to the past 75 years, when average PE ratio is above 17, the market price is considered as high. Federal Reserve Bank plays an important role in interest rate. The financial market is less favorable when federal fund rate increases.
When the market price (PE ratio) is high, interest rate is increased and the market shows an upward trend, it is a signal for selling your stocks. In the contrary, when the market price (PE ratio) is low, interest rate is low and the market shows a downward trend, it is a signal for buying stocks. Otherwise, you should hold your stocks.
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