05 March 2011

To "Buy and Hold" or Not

After my previous post, I was inclined towards quantifying returns from some simple strategies like buy and hold, buy above 200 day moving average and be in cash when price is below it and that of golden and death cross etc. These strategies can get complex if we also add an option to short the market when its weak or the option to be in fixed income when in cash. It could get even more complex when we try to have an asset allocator to move into fixed income, equities and safe havens like gold! Anyway I think we can dwell into those only when we get over with the simplest ones.

So let me compare the two simplest strategies available "buy and hold" and "buy above 200 day moving average and be in cash when price is below it". Here time is an important factor and as you know the power of compounding can do miracles in long term, though then we have to price in Inflation, which certainly is a headache for long term investors.

As the above chart shows, we are tracking these two strategies since mid july 1991, which is almost full 20 years. Long enough for people to retire, kids to grow up and housing loan EMIs to get over! So what do we see, we see that in 20 years buy and hold has done quite good (13.6% compounded annually) , but when you compare it against the other strategy it is dwarfed (28.7%)!! No wonder people are and should be scared when price is below 200 day moving average.

(I think long term fixed income rate would be around 8% and inflation rate to be around the same levels).

This study also shows that even the smallest of interference with the investment idea can actually improve it in long term!

Next we will try to quantify returns of a golden cross, any guesses if it can beat our simple strategy!!


alphabet1 said...

You assume to extrapolate the past performance to the future.
You expect Indian NSE will grow at same pace in next 2 decades.
Everyone has his time under the sun. India has enjoyed the glory. Earlier Japan did, USA tech did.

Your study is an excellent academic paper but tricky if you change the base year to 1960,1970,1980 and nearer 2005. Its all in statistics base year.

Despite my HAHA let me say you are select handful of bloggers I visit to read and like.

Tarique Anwar said...

Looks like though you read my blogs you forget them as well. first things first, I have not in this post ever said that I am expecting Nifty to carry on this growth further and give you a 13% return in another 20 years.

coming to the strategy described above, i think it will work perfectly fine if we are to get into a bear market for another 20 years.. you will never be in stocks as nifty will be always below 200dma..

also i am a believer of elliot wave which is currently begging people to get out of stocks.. i know the juice in indian market is gone and getting returns like past 2 decades will not be easy in next 2 decades..

alphabet1 said...

My dear Shri Anwar,
I read your blog and like yr analysis.
Just dont let academic excellence overtake the pragmatic - that is how to earn money from the market.
More later as I rush to office.
Do keep posting.

Tarique Anwar said...

@alphabet actually i am not sure what you want to say? neither i am suggesting you to buy and hold nor i am suggesting you to follow the strategy here. obviously i am trying to publish some academic study that i am doing. whether its of any help or not is pure his take.

i am sure if you had enough experience of market and respect for it,you would not have brushed aside these "studies".

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