Trading Techniques  |  BON 2007

Trading Vs. Buy & Hold by Glenn A. Barlis

Trading Vs. Buy & Hold by Glenn A. Barlis Here’s a look at the profit potential of trading compared with buy & hold. Numerous strategies for accumulating wealth through stock investments have held prominence over the years. Conventional wisdom used to be that you bought quality stocks and put them away to collect dividends and capital appreciation. The late 1960s was the heyday of growth stocks, as popularized in Adam Smith’s book The Money Game. In recent years, the efficient market hypothesis, which essentially states that only average returns are possible, has become the foundation of conventional investment strategy. The popularity of index funds and diversified portfolios is an indication of this influence. However, Technical Analysis of STOCKS & COMMODITIES readers do not easily accept the efficient market hypothesis. Technical analysis is an attempt to use stock price and volume data to achieve returns greater than offered by buy & hold. In this article I will examine historical data on the Standard & Poor’s 500 to demonstrate the significant profit potential of trading over a buy & hold strategy. ASSUMPTIONS For the purpose of this analysis, I will make these assumptions: 1. The Standard & Poor’s 500 can be traded throughout the study period using a single instrument such as SPY. To simplify calculations, the price/unit is assumed at a tenth of the index. 2. Dividends are not accounted for in the calculations, again for the sake of simplicity and for the lack of complete data. This understates the net return but does not change the relative comparisons of different strategies.

by Glenn A. Barlis