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Buy and Hold is not a form of risk management.

by steveplace 18y ago

byrneseyeview 18y ago
"Sell it when it's on sale" isn't a way to produce capital gains.
- steveplace 18y ago
  "Sell when your overexposed to a particular asset class" is a much nicer approach. That's a fancy way of saying take profits.
  - byrneseyeview 18y ago
    Sell when my overexposed to an asset class what? I don't understand how that's relevant, anyway: if the price of one asset class goes down, you are less exposed than before -- and if you are still overexposed, why didn't you sell earlier?
    - steveplace 18y ago
      Here's two questions that many people don't ask themselves when they invest. 1) Buy and hold until when? 2) What if you're wrong? As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified.
      - byrneseyeview 18y ago
        1) Until I can find a better business at a better price, adjusted for tax consequences? 2) It's impossible to usefully answer this question without recursing into nihilism. Consider: I think there's an 80% chance that BioCo's new drug will be a hit, and the stock will go from $5 to $10. Does "What if you're wrong?" mean I dial up the uncertainty everywhere (70% chance of going from $5 to somewhere between $8 and $12?). Okay, fine. Now I think there's a 70% chance that the new drug will be a hit, and the stock will trade between $8 and $12. But what if I'm wrong? Well, it must be time to dial up the uncertainty even more -- 50/50 chance of trading between $5 and $15, perhaps. It doesn't add any useful information to just keep second-guessing oneself, or to have a rule that amounts to "Be less certain than you usually are, except about the statement "Be less certain than you usually are, except about the statement "Be less certain...""" It's good to collect enough information to consider different scenarios, but it does no good to blindly assume that you're wrong about a given stock. As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. That's true. In a scenario like the one we have now, that would imply buying. Also, holding (until a better deal comes along). I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified. I'm not sure what this means. Asset-class allocators don't seem to get better results than people who buy good businesses at good prices. At least, I see fewer people who allocate their way onto the Forbes 400.

Buy and Hold is not a form of risk management.

byrneseyeview 18y ago

"Sell it when it's on sale" isn't a way to produce capital gains.

steveplace 18y ago
"Sell when your overexposed to a particular asset class" is a much nicer approach. That's a fancy way of saying take profits.
- byrneseyeview 18y ago
  Sell when my overexposed to an asset class what? I don't understand how that's relevant, anyway: if the price of one asset class goes down, you are less exposed than before -- and if you are still overexposed, why didn't you sell earlier?
  - steveplace 18y ago
    Here's two questions that many people don't ask themselves when they invest. 1) Buy and hold until when? 2) What if you're wrong? As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified.
    - byrneseyeview 18y ago
      1) Until I can find a better business at a better price, adjusted for tax consequences? 2) It's impossible to usefully answer this question without recursing into nihilism. Consider: I think there's an 80% chance that BioCo's new drug will be a hit, and the stock will go from $5 to $10. Does "What if you're wrong?" mean I dial up the uncertainty everywhere (70% chance of going from $5 to somewhere between $8 and $12?). Okay, fine. Now I think there's a 70% chance that the new drug will be a hit, and the stock will trade between $8 and $12. But what if I'm wrong? Well, it must be time to dial up the uncertainty even more -- 50/50 chance of trading between $5 and $15, perhaps. It doesn't add any useful information to just keep second-guessing oneself, or to have a rule that amounts to "Be less certain than you usually are, except about the statement "Be less certain than you usually are, except about the statement "Be less certain...""" It's good to collect enough information to consider different scenarios, but it does no good to blindly assume that you're wrong about a given stock. As for becoming overexposed... if you've got Stock/Index A that is allocated for 10% of your portfolio and the market price doubles, you're allocation is now 20% (all things being equal). So you need to adjust your position sizing, unless you want to have 20% of your assets under that particular security. That's part of portfolio rebalancing and money management. If the price of a security goes down and you want to have the same exposure in it, then you would buy more to maintain it. That's true. In a scenario like the one we have now, that would imply buying. Also, holding (until a better deal comes along). I also don't think people really take asset classes into account, mainly because there's not a lot of money in their portfolio to be truly diversified. I'm not sure what this means. Asset-class allocators don't seem to get better results than people who buy good businesses at good prices. At least, I see fewer people who allocate their way onto the Forbes 400.