Monday, May 2, 2016

Benefits of Model - Part 4

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.