Buy and hold vs. active portfolio management

[Value Collector]

Your missing the ability to react in equities almost instantly
your under valuing that uniqueness.

I’m not missing the “unique” liquidity of shares, I am just recognising it’s a double edged sword, where as I showed the “do nothing” approach to CBA netted you $1.3 Million over the period, the only reason to take the active approach would be to try and improve on that return and earn more than $1.3 million.

However, you do face some large automatic headwinds, as soon as you begin selling, you face trading costs and taxes, that immediately erode some of that gain, where as having the principle compound tax free until the end provides a tail wind, you can keep those tax dollars working for you for decades before you have to hand them over, and then you get a 50% tax discount.

You also open yourself up to mistakes, as I mentioned to So cynical, many people have lost money on CBA over the years, by trying to second guess the market, it would seem impossible to lose on something that went from $12,500 to $1,300,000, but lots of people have, for them liquidity definitely was a curse.

also, if we were all traders, who would buy from us when the chart indicates us to sell? If 90% of the market was trying to enter or leave the market regularly, it would just create more volatility, and make the brokers richer, the net gain of investors over time would be less, some would win and some would loss, but as a group the investing public would be poorer, and the middle men richer.

 

[tech/a]

I’m not missing the “unique” liquidity of shares, I am just recognising it’s a double edged sword, where as I showed the “do nothing” approach to CBA netted you $1.3 Million over the period, the only reason to take the active approach would be to try and improve on that return and earn more than $1.3 million.

Which I did.

you can keep those tax dollars working for you for decades before you have to hand them over, and then you get a 50% tax discount.

Tax has never been an issue for me.
While I do everything I can to minimise tax ( Well my CCA does )
If I have to pay tax I’ve put my $$s to productive use.I’ve liquidated
and have it to use at the drop of a dime.

 

[tech/a]

I am just recognising it’s a double edged sword, where as I showed the “do nothing” approach to CBA netted you $1.3 Million over the period

It occurred to m3 I’m doing exactly the same in your instance
I can’t believe you let $1,2 million slip by in a few weeks!
We aren’t as far apart as some would think!

 

[sptrawler]

In my opinion a lot of the risk that investors take on, is a reflection of their situation, I risk what I'm prepared to loose because in retirement I also need a safety buffer.
When I was working my risk tolerance was much higher, as investment was really my second income, now my investments are our only income.
So as I said having a portfolio made up of buy and hold dividend payers, long term growth plays and short term specs is my comfort zone. Backed up by a good slice of cash in case of armageddon, to carry us through to the next upswing, which history shows can take a few years.

 

[divs4ever]

just keep a careful watch on your cash reserves , there has been a history of banks limiting withdrawals in stressful times

( that could be really nasty if we ever switch 100% digital currency )

 

[Value Collector]

It occurred to m3 I’m doing exactly the same in your instance
I can’t believe you let $1,2 million slip by in a few weeks!
We aren’t as far apart as some would think!

Yep, but if you look at the CBA chart between 1992 and Now, there are multiple big down turns, the largest being a drop around 2008 from $60 per share to $26, another drop from $92 to $58, another drop from $36 to $22, of course all these drops didn’t stop the end result of turning $12,500 into $1,300,000.

share prices will be bumpy, but if you are invested in strong companies, that are growing in value, you don’t have to let yourself get wrapped up in the panic.

I believe that if we look back at FMG 2 years from now, the current drop will be just a blip on a longer road to a higher share price, with decent dividends in the mean time.

 

[Value Collector]

In my opinion a lot of the risk that investors take on, is a reflection of their situation, I risk what I'm prepared to loose because in retirement I also need a safety buffer.
When I was working my risk tolerance was much higher, as investment was really my second income, now my investments are our only income.
So as I said having a portfolio made up of buy and hold dividend payers, long term growth plays and short term specs is my comfort zone. Backed up by a good slice of cash in case of armageddon, to carry us through to the next upswing, which history shows can take a few years.

In what I call my “spending money fund” I have about a years wages in cash, another 3 years in Plenti paying weekly principle and interest payments, and another year of wages in a property trust… this little fund is like aannuity paying money to me every Thursday like a wage.

I then have my main investment portfolio that pays dividends, 50% of the income is reinvested and 50% tops up my spending money fund.

I also own a little bit of realestate, that is just like a store of value, with all rental returns being used to pay down debt.

I then have an international share portfolio, it’s earnings are 100% reinvested, so it’s just another store of valuing growing if I ever need to draw on it.

My wife’s investment portfolio is just compounding, we reinvest 100% of her earnings, we live of my portfolio.

 

[sptrawler]

In what I call my “spending money fund” I have about a years wages in cash, another 3 years in Plenti paying weekly principle and interest payments, and another year of wages in a property trust… this little fund is like aannuity paying money to me every Thursday like a wage.

I then have my main investment portfolio that pays dividends, 50% of the income is reinvested and 50% tops up my spending money fund.

I also own a little bit of realestate, that is just like a store of value, with all rental returns being used to pay down debt.

I then have an international share portfolio, it’s earnings are 100% reinvested, so it’s just another store of valuing growing if I ever need to draw on it.

My wife’s investment portfolio is just compounding, we reinvest 100% of her earnings, we live of my portfolio.

I don't think I'm in the same league as you, also with four older kids who between them have our 8 grandkids, the bank of mum and dad is alive and well. ?
My investments, just allow us to break even.

 

[divs4ever]

I believe that if we look back at FMG 2 years from now, the current drop will be just a blip on a longer road to a higher share price, with decent dividends in the mean time.

a very convenient blip for me , but i do expect MORE blips in the near term .

the global economy is a twisted mess , and ideally steel production needs a stable environment and sensible growth ( or God forbid .. a terrible war )

history can be very educational , but in investing it is all about making the best choices NOW ( for you ) ( and learning from your past errors can be very useful as well )

( but history rhymes more often than it repeats )

 

[againsthegrain]

a very convenient blip for me , but i do expect MORE blips in the near term .

the global economy is a twisted mess , and ideally steel production needs a stable environment and sensible growth ( or God forbid .. a terrible war )

history can be very educational , but in investing it is all about making the best choices NOW ( for you ) ( and learning from your past errors can be very useful as well )

( but history rhymes more often than it repeats )

Probably should take it to fmg thread but since we on the topic... china back flipped on coal already they will eventually back flip on io too

 

[divs4ever]

i could flip it back by suggesting Evergrande woes are a timely warning to a very common practice in construction projects world wide

as ALL major lenders ( and mortgage brokers ) should quickly recheck their exposure to fragile companies

last i heard CBA is still the biggest holder of Australian mortgages , and given recent virus-related disruptions to the status quo must be looking at a reduced safety buffer ( compared to earlier times )

now sure the Commonwealth Government will save the CBA from a complete collapse , but it has also made commitments regarding the Basel III 'bail-in policies ' AND a the bank deposit guarantee ( if you don't know all about THAT .. READ ALL ABOUT IT this weekend )

when does Canberra throw the lifeline .. and who gets hurt ( apart from obviously , the tax-payer )

 

[Value Collector]

last i heard CBA is still the biggest holder of Australian mortgages , and given recent virus-related disruptions to the status quo must be looking at a reduced safety buffer ( compared to earlier times )

I am actually not so sure about that, House hold finances on average appear to be quite strong, interest bearing credit card debt has dropped, and low interest rates have meant the average home loan is now ahead in payments.

I think the biggest threat to CBA is disruption from new tech, but CBA seems to be getting ahead of the game and making their digital platform quite appealing.

 

[tech/a]

could flip it back by suggesting Evergrande woes are a timely warning to a very common practice in construction projects world wide

Not in Australia.
Evergrande built without sale of product which is pretty common in the USA

In Australia developers tend to sell 70-100% of a development before starting a project.
This can / does cause other issues but generally saves an Evergrande type scenario.

 

[divs4ever]

having done a little work for a property developer , what OFTEN happens is yes the client pays up front BUT not the total price , now depending on how it is setup you pay an upfront deposit and some more as certain milestones are passed , if the building is never completed to the buyers satisfaction ( and yes the buyer sometimes rightfully refused to settle ) ... the buyer does lose some cash but not the total amount , and that starts a cash-flow cascade

so after the Evergrande reminder the lender to the developer gets nervous , the lender to the contractors ( and sub-contractors ) gets nervous ( and if the property is being bought with a mortgage the mortgage lenders and insurers start to sweat as well

i used to have several buddies that were in the building game ( they have retired now , waited for a boom and cashed out ) and they often bear the first wave of pain as the developer stops paying .. so how long do you think the contractor will keep paying wages , buying supplies etc etc once the income stops sure the developer might get 3 months breathing space but the LENDERS ( often closely intertwined with the banks ) soon get a whiff that there are problems .

now so far maybe 5% of potential buyers notice the problems highlighted by Evergrande , but half of those still sign new contracts , that 2.5% no longer buying , starts a trickle down ( the banks start to worry how easy it will be to sell that foreclosed property

am not saying panic ( unless uncomfortably in debt ) but just keep watching and reduce that risk when you sensibly can

( i swapped out of corporate bonds/debt into extra REITs , for that 'regular income ' component of the portfolio , so naturally i am cautious )

 

[tech/a]

I watch my investment portfolio very closely and would not hesitate to sell if my opinion of the company’s long term performance changed or if I realised I was wrong about my calculations. But the difference between me and you is that I am looking at the company from a long term fundamental business perspective, I am not making decisions based on share price movements, I am strictly judging the company fundamentals.

@Value Collector

This above statement is the essence of your mindset. I and everyone else here and those that really take note of it in the future can only nod in agreement.

Completely in line with the above if (and its likely to happen to ALL of your holdings at the one time) are sold down CLEARLY due to factors NOT related to the Companies Performance or Valuation
eg GFC,COVID,1987,

From the discussion here I dont see anyone who thinks that buying into the lows of companies like those you have judged to be fundamentally sound is NOT a wise Idea.
You can clearly see that everyone is jumping off a perfectly safe and sound Ship.
The biggest issue I see discussed here are Investors who just dont have the funds available to Load up MORE

So if its that clear and we have seen it play out countless times. Why wouldn't you sell at -20% off recent high in a day or two
(A very rare occurrence blind Freddy cab see it!) And buy back when the perfectly good ship is sailing again empty and very cheaply!

Over a lifetime of investment this simple strategy could Quadruple you and your families Net worth.

Its Not hard.

 

[Value Collector]

@Value Collector

This above statement is the essence of your mindset. I and everyone else here and those that really take note of it in the future can only nod in agreement.

Completely in line with the above if (and its likely to happen to ALL of your holdings at the one time) are sold down CLEARLY due to factors NOT related to the Companies Performance or Valuation
eg GFC,COVID,1987,

From the discussion here I dont see anyone who thinks that buying into the lows of companies like those you have judged to be fundamentally sound is NOT a wise Idea.
You can clearly see that everyone is jumping off a perfectly safe and sound Ship.
The biggest issue I see discussed here are Investors who just dont have the funds available to Load up MORE

So if its that clear and we have seen it play out countless times. Why wouldn't you sell at -20% off recent high in a day or two
(A very rare occurrence blind Freddy cab see it!) And buy back when the perfectly good ship is sailing again empty and very cheaply!

Over a lifetime of investment this simple strategy could Quadruple you and your families Net worth.

Its Not hard.

I thought I had explained it before, what you are basically saying is that after FMG dropped from $25 to $20 that should have triggered me to sell, but obviously I had no way of knowing that the price would continue to fall, it certainly wasn’t clear to me at the time.

In fact six months earlier FMG had dropped from $25 to $20 and then quickly bounced back, if I had sold then I would have just probably had to buy back in at a higher price, while triggering a capital gains tax event where I would have had to pay about $7 a share in capital gains tax, and also potentially missed out on the $1.47 dividend.

The end result is that in Jan had I sold I would have ended up with less shares because of buying back in higher, along with the CGT and trading costs deducted, so then would have had a smaller dividend from the final dividend too.

But let’s say I didnt sell out in Jan but did this time round at $25, again I would have had to hand over $7 in CGT leaving me with $18 after tax to buy the shares back, but I would have also missed the $2.11 dividend, so my break even point would be about $15.90, but again I had no information to guarantee it would drop that far, and probably would have bought back in earlier than that anyway, because I doubt I would have timed it perfectly.

basically what I am saying is that I think it’s risky either way, and the company is going in the direction I want it to go, I think it’s safer for me, and less stress and work, to just stay put.

 

[dyna]

Don't derail it please (anyone) because there are some interesting points of view.

( Still trying to conquer that terrible habit ,of going off at a tangent, myself. )
This would have to be one of the very best threads, I've found on this forum. I'm astonished by the various means people have taken to creating wealth, some paths quite similar to my own: starting from zero at an early age, getting my head around superannuation while still an apprentice just out of junior high school and getting lucky with R.E. ( Yes , it is mostly luck. Choosing up market locations when they were affordable, Plus adding value to the properties, along the way )
Thirty years ago, I had to give up on the Elliot Wave stuff, before I lost my mind, but
Nick Radge's " Unholy Grails: a New Road To Wealth" ( Noosa Publications,2,012 ) is in a class of its own. One of my favorite investment books, by far. Well worth a careful, slow read and definitely not for day traders. Momentum investing can apply for as little as a couple of trades a month. The concept really only works in rising markets? True, but so does the whole notion of Buy and Hold . There are numerous share charts with simple moving average lines for CBA Bank, Fortescue etc, throughout the book. Whether you're a Fundamental or a Tech trying to find a workable system, this local author is a gem for you.

 

[divs4ever]

** jump off a perfectly sound ship **

not NORMALLY , reduce the cargo on that ship ... quite often and often in good times ( which confounds many )

however i DO jump ship on a ship i suspect is not fundamentally sound or one that seems to be rushing into dangerous waters ( or is showing signs of management dysfunction ) .

 

[tech/a]

Thanks.
Ive put it out there
Some may like it.

 

[divs4ever]

( Still trying to conquer that terrible habit ,of going off at a tangent, myself. )
This would have to be one of the very best threads, I've found on this forum. I'm astonished by the various means people have taken to creating wealth, some paths quite similar to my own: starting from zero at an early age, getting my head around superannuation while still an apprentice just out of junior high school and getting lucky with R.E. ( Yes , it is mostly luck. Choosing up market locations when they were affordable, Plus adding value to the properties, along the way )
Thirty years ago, I had to give up on the Elliot Wave stuff, before I lost my mind, but
Nick Radge's " Unholy Grails: a New Road To Wealth" ( Noosa Publications,2,012 ) is in a class of its own. One of my favorite investment books, by far. Well worth a careful, slow read and definitely not for day traders. Momentum investing can apply for as little as a couple of trades a month. The concept really only works in rising markets? True, but so does the whole notion of Buy and Hold . There are numerous share charts with simple moving average lines for CBA Bank, Fortescue etc, throughout the book. Whether you're a Fundamental or a Tech trying to find a workable system, this local author is a gem for you.

try thinking of Elliot Waves as human psychology , somebody notices an item ( company ) is attractive and buys some , now if that someone has influence in the greater social fabric more and more will buy , UNTIL it loses it's novelty value , and some will lose interest and others will have unwisely over-extended ... now depending on the depth of the price fall some NEW buyers will come in ( those that would not 'buy in at any price ' , earlier , and some current owners that consider a larger holding ( at a fair price ) a good thing

after all that. some will throw some maths at this phenomenon ( and Fibonacci ratios ) to try to get a better outcome , for trend traders these math calculations can be important , being a contrarian the maths are less important than the movement direction ( i set up my own 'fair value ' price and WAIT , and yes sometimes i am disappointed )



PS one parameter i try to use on every stock .. is .. am i happy to hold ( SOME ) of this stock forever ( or until a major reason to bail ) ??

to my mind another consideration in the ' buy and hold ' argument , is how long you expect to hold

currently i am 65 ( ish ) so holding the portfolio ( intact ) for another 30 years is NOT a safe assumption , however i suspect several members still have another 30 years of investing decisions ahead of them ( or have already been investing for 30 years ) and straight 'buy and hold ' puts up a much stronger argument there