In this contributed white paper from newly-formed brokerage tastyworks, the firm shares its thougts on te differences between passive investing and active investing and how “market randomness” can be used to gain a trading advantage.
Opening of the Paper:
Despite the financial industry advising investors for decades to use a buy-and-hold approach to stocks and equity funds with the argument that stock prices generally rise over time, data shows that this is a poor way to generate wealth, even long-term. The random nature of stock prices means inflation-adjusted returns significantly underperform investment targets, and exposes the buy-and-hold investor to greater risk than Wall St. will acknowledge.
Research highlights include:
Since 2000, buying-and-holding a market portfolio has yielded only 3.5% inflation-adjusted returns, but with 6x the risk that can wipe those returns out in any given year.
To be successful with a buy-and-hold strategy you need to have the same luck as guessing coin flips correctly for the next 20 years.
A more engaged investment strategy has yielded 16% higher inflation-adjusted returns since 2000, and with only 2/3 the risk.
On a trade-by-trade basis, an actively managed portfolio was profitable 22% more frequently than buy-and-hold.
To view the white paper in its entirety,please click here.
