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.
For the purpose of this analysis, I will make
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.