In response to last month’s article (Investment Fallacies, Part 1), a long-time reader asked about some claims he had heard from a well-known TV personality who bought and sold individual stocks. The TV pundit claims that he had the ability to consistently generate positive returns with his approach.
The strategy used by this particular personality uses momentum and technical indicators to make short-term trades in stocks. Traders who use technical indicators and momentum look at historical charts of stock prices and try to determine which direction a stock is headed in the future. This differs from fundamental analysts who look at the underlying data regarding sales, earnings or other firm-specific data and make longer-term predictions about whether a company is overvalued or undervalued. Technical traders often hold positions for only a few days, or even a few hours.
We used the opportunity to review the specific stock selections of this individual during 2017, which he published on his website. Not surprisingly, we found that returns were not consistently positive, and underperformed a simple passive index of U.S. stocks during the year we reviewed.
Moreover, traders attempting to follow these short-term trading strategies will undoubtedly incur significant trading costs. And any capital gains on trades will be subject to short-term capital gains taxes, which are unfavorably taxed as ordinary income.
Our approach does not require investors to guess what stock is going to do great this week or next. It does not incur large transaction costs, and it almost never results in short-term capital gains, since positions are meant to be held for the long-term (investments held greater than one year receive a more favorable tax treatment). This allows investors who follow the AIS approach to do those things they enjoy more than day-trading stocks. Ours is a better means of helping investors meet their financial objectives.
Also in This Issue:
Investment Fallacies Part Two
The Latest Cyber Threat: SMiShing
Assessing Risk in Retirement
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Recommended Investment Vehicles
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