Over the past few weeks, we have analyzing the performance of our proprietary algorithm and its non-financial benefits.
In addition to amazing returns, one other benefit that we would like to highlight is the ability to utilize Buy and Sell strategy. This benefit is in addition to the following benefits that we have analyzed in detail as part of Q1 performance evaluation:
- Peace of Mind
- Less Stress during Market Volatility & Eliminating Emotions
- Trend/Momentum following ability
- Diversification
- Positioning for next market move
7. Buy and Hold Strategy
Buy and Hold strategy has numerous benefits both monetary and
psychological.
There are several types of monetary benefits:
1. Long-term
growth of prices
2. Reduced
tax rates
3. Best form
of tax deferred growth - if you don't sell, no need to pay taxes
If a person holds a stock holding fore more than 12 months, he has
to pay 15% (20% in case of max tax bracket) capital gains taxes. On the other
hand, if a person sell stocks in less than a year, capital gains are treated as
short-term gains and result in taxes at marginal income tax rate. These kind of
tax benefits really add-up when you consider long-term structure of
investments.
Furthermore, the common understanding is that prices grow over
very long periods of time and majority of gains occur in few days of trading
e.g. days when market opens up 400 points. Therefore, if one is continuously
holding stocks, they will most likely do well in the long-run (except for bear
market).
From Psychological perspective, this strategy helps to reduce the
following:
1. Stress
associated with daily market gyrations
2. Pressure
to act in face of declining or rallying prices
Portfolio Enhancement Algorithm allows the investor to benefit
from above mentioned benefits of Buy and Hold Strategy without being compelled
to act. This strategy has a plan, which will be implemented and will help with
long-term capital gains, rather than short-term gains. As a result, one can
reap both emotional and monetary benefits of the Buy and Hold strategy through
Portfolio Enhancement Model.
In the next post, we will review some quantitative risk measures to highlight model's performance in relationship to various statistical risk measures.
