The Trouble with Buy-and-Hold Forever…

Interesting report titled “MYTH: Time reduces risk” by Ineichen Research & Management:

Some academic finance literature suggests that time diversifies risk, meaning that investing for the long term reduces risk. Disciples of buy-and-hold strategies also believe in the idea of time diversification. The logic is that if one has a very long investment horizon, one can recover from large losses. The counter argument is that time actually amplifies risk. The logic here is that over the longer term, more bad things can happen and the probability of failure and destruction is higher.

We think time diversification is a myth. Time amplifies risk. It is true that the annual average rate of return has a smaller standard deviation over a longer time horizon. However, it is also true that the uncertainty compounds over a greater number of years. Unfortunately, the latter effect dominates in the sense that total return becomes more uncertain the longer the investment horizon. Furthermore, betting on the long term might not be applicable for most investors. After all, the long term is nothing else than many short-term periods joined together.

I think there is a fair amount of confusion between what “long-term investing” entails and “buy-and-hold-forever” type of investing and investors get into all sorts of trouble because of that. (here)

Also, the paper talks about diversification being the only free lunch. But the problem is best described by Howard Marks (here):

  • If you concentrate your portfolio, your mistakes will kill you.
  • If you diversify, the payoff from your successes will be diminished.

You should read the entire article:

Opening Bell 21.11.2014

Your world at 9am

world.2014-11-21

Equities

Major
DAX(DEU) +0.12%
CAC(FRA) -0.75%
UKX(GBR) -0.26%
NKY(JPN) -0.78%
SPX(USA) +0.20%
MINTs
JCI(IDN) -0.04%
INMEX(MEX) +0.24%
NGSEINDX(NGA) -2.10%
XU030(TUR) +1.43%
BRICS
IBOV(BRA) +2.58%
SHCOMP(CHN) +0.41%
NIFTY(IND) +0.23%
INDEXCF(RUS) +0.82%
TOP40(ZAF) -1.90%

Commodities

Energy
Brent Crude Oil +0.39%
Ethanol +3.59%
Heating Oil +0.28%
Natural Gas -0.91%
RBOB Gasoline +0.67%
WTI Crude Oil +0.65%
Metals
Copper +0.00%
Gold 100oz +0.00%
Palladium +0.53%
Platinum +0.47%
Silver 5000oz +0.00%

Currencies

USDEUR:-0.15% USDJPY:-0.42%

MINTs
USDIDR(IDN) -0.08%
USDMXN(MEX) -0.04%
USDNGN(NGA) -1.01%
USDTRY(TUR) +0.05%
BRICS
USDBRL(BRA) +0.06%
USDCNY(CHN) -0.05%
USDINR(IND) -0.01%
USDRUB(RUS) -0.95%
USDZAR(ZAF) -0.17%
Agricultural
Cattle +0.00%
Cocoa +0.00%
Coffee (Arabica) -5.00%
Coffee (Robusta) +0.00%
Corn -0.20%
Cotton +0.12%
Feeder Cattle +0.00%
Lean Hogs +0.00%
Lumber +0.89%
Orange Juice +2.02%
Soybean Meal -0.76%
Soybeans -0.39%
Sugar #11 +1.13%
Wheat -0.37%
White Sugar +0.00%

Credit Indices

Index Change
Markit CDX EM +0.36%
Markit CDX NA HY -0.13%
Markit CDX NA IG -0.32%
Markit CDX NA IG HVOL -0.03%
Markit iTraxx Asia ex-Japan IG +0.36%
Markit iTraxx Australia -0.43%
Markit iTraxx Europe +0.02%
Markit iTraxx Europe Crossover +1.37%
Markit iTraxx Japan +1.83%
Markit iTraxx SovX Western Europe -0.50%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.20%
US Dollar corrected a bit and NKY is down this morning. Oil traded higher. Doesn’t look like there’s much to get excited about today…

Must reads

Rs.43,033 crore to supply electricity through separate feeders for agricultural and rural domestic consumption. Rs.32,612 crore on an integrated power development initiative, which involves strengthening sub-transmission and distribution systems. Rs.5,111.33 crore for the North Eastern Region Power System Improvement Project. (LiveMint, #economy)

Commodities are headed for their fourth consecutive year of losses. So far this year investors have pulled $17bn from commodity index products, more than double the outflows in all of 2013. (FT)

US Private Equity: Investors seeking higher returns than those provided by the S&P 500 Index, and considering investing in private equity, would, on average, be better served by looking to small value stocks (both domestically and internationally) in the public markets. (ETF, #private equity)

Case for loose monetary policy to continue into the foreseeable future:

  1. US Manufacturing PMI hits 10-month low. New export sales decline at sharpest pace since June 2013.
  2. Flash Eurozone PMI Composite Output Index at 51.4 (52.1 in October). 16-month low.
  3. Flash Eurozone Manufacturing PMI at 50.4 (50.6 in October). 2-month low.
  4. Flash China Manufacturing PMI at 50.0 in November (50.4 in October). Six-month low.
  5. Flash China Manufacturing Output Index at 49.5 in November (50.7 in October). Seven-month low.

Good luck and have a nice weekend!

Opening Bell 20.11.2014

Your world at 9am

world.2014-11-20

Equities

Major
DAX(DEU) +0.17%
CAC(FRA) +0.09%
UKX(GBR) -0.19%
NKY(JPN) +0.02%
SPX(USA) -0.15%
MINTs
JCI(IDN) -0.63%
INMEX(MEX) +1.33%
NGSEINDX(NGA) -2.15%
XU030(TUR) +0.05%
BRICS
IBOV(BRA) +2.58%
SHCOMP(CHN) -0.07%
NIFTY(IND) -0.52%
INDEXCF(RUS) -0.11%
TOP40(ZAF) -0.62%

Commodities

Energy
Brent Crude Oil +0.00%
Ethanol +2.67%
Heating Oil +0.08%
Natural Gas +0.02%
RBOB Gasoline -0.46%
WTI Crude Oil -0.08%
Metals
Copper +0.00%
Gold 100oz +0.00%
Palladium -0.77%
Platinum -0.93%
Silver 5000oz +0.00%

Currencies

USDEUR:+0.05% USDJPY:+0.22%

MINTs
USDIDR(IDN) +0.23%
USDMXN(MEX) +0.05%
USDNGN(NGA) +0.06%
USDTRY(TUR) +0.12%
BRICS
USDBRL(BRA) -0.44%
USDCNY(CHN) +0.08%
USDINR(IND) +0.35%
USDRUB(RUS) -0.26%
USDZAR(ZAF) +0.11%
Agricultural
Cattle +0.00%
Cocoa +0.00%
Coffee (Arabica) +3.27%
Coffee (Robusta) +0.00%
Corn +0.07%
Cotton -0.41%
Feeder Cattle +0.00%
Lean Hogs +0.00%
Lumber +2.23%
Orange Juice +1.02%
Soybean Meal -0.89%
Soybeans +0.72%
Sugar #11 +0.76%
Wheat -0.46%
White Sugar +0.00%

Credit Indices

Index Change
Markit CDX EM +0.16%
Markit CDX NA HY -0.11%
Markit CDX NA IG +0.57%
Markit CDX NA IG HVOL +1.00%
Markit iTraxx Asia ex-Japan IG -0.64%
Markit iTraxx Australia +0.54%
Markit iTraxx Europe +1.10%
Markit iTraxx Europe Crossover +2.55%
Markit iTraxx Japan -0.90%
Markit iTraxx SovX Western Europe +0.01%
Markit LCDX (Loan CDS) +0.00%
Markit MCDX (Municipal CDS) +0.37%
A mixed bag across markets and asset classes…

Must reads

Its official: Bitcoin is a commodity and will be regulated as one. (WSJ)

The controversial developments at IT major Infosys’ BPO arm just got murkier as a whistleblower claims that the group management knew of the financial irregularities ‘many months ago’ but did not act on it. (NIE) INFY 4,144.00 -81.60 (-1.93%)

Axis Bank to focus on credit card and personal loan businesses to boost margin. (ET) Not so fast, says RBI. (TOI, #regulation)

Vikram Pandit, JM Financial to invest Rs900 crore in real estate NBFC. (LiveMint, #real estate)

Good luck!