The two main hurdles to growing the value of your share portfolio are:
- To be caught on the wrong side of a price trend; to stay long (to buy first to be able to sell later at a profit) in a falling market, or to take a short (to sell first to be able to buy later more cheaply) position in a rising market.
- To fail to capture trends in a timely manner. There is an opportunity cost to investors when the prices of the shares in their portfolio stop trending, and simply move sideways. This is an issue particularly for shares that do not pay dividends.
To focus on achieving the best price. because it seems like a bargain, risks being caught out if the trend moves against one’s position.
On the other hand if one just focuses on entering mature trends regardless of the historic price, one risks having the gains eroded and needing to sell to prevent loss if the long-term trend were to change.
Frequently stocks which have finished trending upwards do not revert immediately into a down trend. More often than not they transition into a trading range in which the share-price moves sideways.
Then too after a down-trend, If the stock price has fallen excessively, but the business is sound, value investors are likely to be attracted into accumulating stock, forming a trading range.
Early entry into a trading range however may result in an opportunity cost when the sideways movement persists month after month, and perhaps continues on indefinitely.
A preferable strategy for retail investors, recommended by technical analysts, is to wait for an impulsive move higher. This can be identified by a “break-out” from the trading range. accompanied by an increase in the daily average true range, The impulsive move is confirmed when the share-price continues to move consistently in this direction. The volume of transactions typically falls off as the movement progresses.
- Stay Positive. Be Flexible. (technicality.me)
- Outperforming the Market in Uncertain Times (fool.com)
- Sir John Templeton 16 Rules For Investment Success (ritholtz.com)
- Revisiting Stocks For The Long Run (ritholtz.com)