Investment strategies, example of a passive investment strategy
Each investor, on the basis of their vision of the market, financial status, attitude to risk, attitudes, chooses for himself strategy of investing in the financial market. Depending on what kind of a sign is put in a basis of classification, we can distinguish several classification of groups of the investment strategies.
On the activity of conduct operations on the stock market there are two types of strategies: the passive strategy and action strategy.
The essence of passive strategy lies in the fact that the investor is acquiring the securities and keeps them for a long time, not giving them any operations. Investor is acting on the principle: buy-and-hold (buy and hold). In implementing this strategy the investor produces the careful selection of shares to buy, which have significant growth potential. As a frame selection of the shares is used methods of fundamental analysis. On the basis of this analysis of the enormous number of traded on the securities market is selected a few of the shares, which are included in the portfolio. These shares will be stored in the portfolio for quite a long time, which is measured by years. In implementing the strategy, the investor does not pay attention to the fluctuations of the exchange rate value of the shares. He does not sell them after they have a few in the price grew up to then buy these shares after the reduction of quotations. He stoically tolerates all the UPS and downs of price, believing in the long-term growth in the value of the shares. An excellent illustration of this strategy is to invest in the shares included in the calculation of the RTS index. If on the date of the calculation of the index, i.e. September 1, 1995, the investor, believing in underestimation of Russian shares, put in these shares 10 thousand dollars and nothing with them has done, that in August 2007 the investments turned in 200 thousand dollars. A very good result.
The postulates of the concept of passive investment:
Information important for determining the price of the shares, is incomplete and not reliable enough. Therefore, the opinion that the shares at the price of increased and they should be sold in order to then buy the cheaper, can be wrong.
Change of quotations of the shares subject to the influence of random events. On the stock market daily events occur, which have an influence on the change of shares prices of those or other companies. It should be noted that the advance of these events are unpredictable. It is very difficult to sell the shares at the peak and buy them at the very bottom. Therefore, attempts to conduct short-term adjustments to the portfolio, according to supporters of this concept are unsuccessful.
Investors do not notice the approach of significant events. Indeed in the financial market is very difficult to predict, as a result of any of the events of shares in price will rise or fall. And for the adjustment of the portfolio (buy or sell shares) to do prior to the occurrence of these events.
When adjusting the portfolio incurs additional costs. We have found that for each operation with the investor are charged a fee of the broker, exchange, and also must pay for the services of the Depository. In addition, there is a spread as the difference between the purchase price and sale price, which also reduces the profitability of operations.
Yield adjustments reduced due to the fact that part of the assets is in cash. When conducting operations on purchase and sale of shares, the investor is always on the account has some cash. The investor keeps the money, waiting for a convenient moment for the purchase of shares. Sometimes these expectations are delayed for a long period of time, resulting in financial losses.
Quite clearly the futility of adjustments spoke winner of the Nobel prize in Economics In. Sharp: «the Manager who tries to change the ratio of assets in the portfolio, to guess in three cases of four to get the same results, as competitors, who do not make adjustments. If he is wrong more often, its effectiveness will be lower in comparison with the competitors. Firstly, as a rule, the Manager keeps the funds in cash equivalents cash at the most opportune time in the market, as a result of which overlooks the highest incomes. Secondly, the transfer of investment is associated with certain costs, but because often unprofitable. Adjustment of the ratio of the assets in the portfolio is able to bring the income of slightly less than 4% in the year, if the Manager is really justified».
Many do not agree with the opinion of famous economist, has received a prize for the theory of formation and management of investment portfolio. However, not to acquaint you with this position would be not quite correct. Moreover, the concept of passive investment is very dear supporters. Here only some of them:
Warren Buffett - the most famous in the world of the investor and the third man in the world's largest wealth. The average term of investing in the shares of a particular company is approximately 10 years.
Peter Lynch Fund Manager Magellan, with assets of $ 12 billion. In his opinion: «the Advantage of the individual investor: not to hurry, concentrate and hold any shares continuously.»
Íèëüå Taube - managing the investments of the Rothschild investment Fund of Soros. Acquires large packages of shares for a long period of time. His principle of investment is the purchase of shares of the companies, which have significantly dropped in value and worth less than its carrying value.
However, the concept of passive investment there are opponents who believe that their assets need to be managed. They are sure that the educated investor is entirely under the power to choose a good time for the purchase and sale of shares. Therefore it is necessary to adhere to an active investment strategy.
The essence of an active strategy is to periodic adjustments of the portfolio, by means of purchase-sale of securities depending on the dynamics of the stock market. This concept assumes that due to active operations can be significantly increase the yield of investments. The empirical validation of the concept of active investment confirm the possibility of conducting successful transactions with securities of and for the account of the multiple increase of yield.
