Saturday, 18 February 2012

Stay in Touch wi th the Market

Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years.  While such a strategy may have made sense at some time in the past, it seems misguided today.  

  • This is because the financial markets are prolific creators of investment opportunities.  
  • Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets.  
  • Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace.  
  • Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings?

Being in touch with the market does pose dangers, however.

  • Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading.  
  • There is a tendency to be swayed by recent market action, going with the herd rather than against it.  
Investors unable to resist such impulses should probably not stay in close touch with the market, they would be well advised to turn their investable assets over to a financial professional.

Another hazard of proximity to the market is exposure to stockbrokers.

  • Brokers can be a source of market information, trading ideas, and even useful investment research.  
  • Many, however, are in business primarily for the next trade.  
Investors may choose to listen to the advice of brokers but should certainly confirm everything that they say.  Never base a portfolio decision solely on a broker's advice, and always feel free to say no.

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