Buy-and-Hold vs. Compounding Gains
The stock market soared on Tuesday, with the S&P 500 surpassing its 2016 opening price. It is now up 0.7% for the year.
If you had invested $100,000 at the beginning of the year, you’d have earned a fantastic $750 to date.
I read an article on Yahoo Finance saying that the most profitable trading strategy was buying and holding.
Yeah, sure. Tell that to the person who began investing at the height of the tech bubble in January 2000.
If this investor put all of his money in the S&P 500 (a relatively “safe” investment), he would not have made a profit on his investment until 13 years later – January 2013.
It’s not as if he had a lack of opportunities to profit; there are 252 trading days in a year * 13 years = 3,276 potential opportunities – at a minimum – to compound his portfolio.
Take a look at the 13-year S&P 500 chart during this time (attached). If the investor would have instead bought during the dips and sold during the peaks, he would have made many returns on his original investment – potentially millions of dollars.
The only reason a buy-and-hold strategy is desirable for the average investor is because the average investor makes emotional, irrational trades. If you are able to put fear aside and buy when the market is low, and put greed aside and sell when the market is high – you will make much more than the average guy who's just holding and hoping the market eventually goes up.
Ask any person with a basic understanding of finance as to which variable affects a portfolio’s value the most. They will tell you that the more frequently your portfolio is compounded, the exponentially faster it will grow.