Wednesday 4 November 2009

Power of Trading

Power of Trading

Many people misunderstand the concept of

  • Long-term investing - To mean that one should sell only when one needs the money
  • Asset Allocation - To mean that one should have a by-and-large-fixed proportion of surplus money to be invested in different asset classes at any given life situation (age, number of kids, etc.)

Both the above are completely wrong. I'll explain in greater detail in later posts.

In this post, I'm going to share with you hypothetical figures of the difference that one can make with

  • Periodic trading, ie., periodically booking profits and re-entering at lower levels
  • Slightly higher levels of returns by allocating a larger share in riskier asset classes.

Take a look at this table:

Power of Trading, rather than holding long-term! Wonder if it is feasible???
Initial Amount Invested
Annual Return
No. of Years
Final Value of Investment
 
 
 
 
 
 
 
Impact of buying shares at just 3% lower cost and trading periodically so as to get just a 2% additional return annually
97,000
1.20
10
600,598
 
100,000
1.18
10
523,384
 
 
 
 
 
 
97,000
1.14
10
359,600
 
100,000
1.12
10
310,585

You'll realise something that ought to be obvious:

  • A 6% higher return can mean an enormous difference to your portfolio value at the end of a decade. Hence, do ensure that you allocate a higher proportion of your disposable surplus in riskier asset classes like equity if you are looking at the long term
  • A strategy that involves periodical profit booking and re-entering at marginally lower levels has quite a significant impact on your portfolio value at the end of a decade. Hence, make it a point to book profits regularly. This will also ensure that you
    • Review your portfolio regularly
    • Cut your losses from unintended dud investments far more quickly

Think about it!

And Act!

Regards,

N


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1 comment:

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