We are occasionally asked questions surrounding day-trading and capitalising on short-term opportunities in the market.
We have outlined (below) why do we not adopt this approach, what is our actual strategy, and for what reasons is this more suitable?
Although we do not actively trade on the stock market, we offer an active and passive approach to investing, which is reflected in our main strategies – core and tactical. Whilst both strategies are actively managed, and several changes can be made per annum, we do not manage these portfolios with a day-trading approach.
There are significant risks to trading funds within a short period of time. Portfolios traded on a day-to-day basis can capitalise on returns from short term movements in the market, however profit margins are generally razor thin. In order to make the significant returns, a considerable amount of capital has to be traded. The potential of making returns comes with the potential to lose a significant amount of money. This is unsuitable for our clients’ money, whose investments are made up of retirement funds and life savings. There is a cost involved with trading funds, something we try to minimise when making our own changes. Whilst this doesn’t drive our investment decisions, trading on a short-term basis would include costs that could potentially diminish returns.
Rather, at Reeves Independent, our clients’ portfolios are actively managed, which, unlike day-trading, involves making changes when conditions in the market are not transitory or when they provide long-term potential returns. Investment decisions are driven by regular research consisting of primary and secondary information. These decisions are made when the information indicates market conditions will expose the portfolios to risk that could dampen returns over the long-term.
Over the long-term, investing in the stock market is typically a positive-sum game. That is, the value of stocks, both individually and collectively, generally rises over the long term.
On the other hand, investing in any asset class with a short term approach is generally a zero-sum game. Therefore, those who hold funds over a longer period of time can typically expect a return from their initial investment, and be a ‘winner,’ rather than trading on the short term and becoming a potential ‘loser’.
There are risks associated with not adjusting our client’s portfolios, as changes in the markets could prolong negative returns if not adjusted accordingly. This is achieved through diversification – rather than regularly changing poor performing funds.
Our portfolios are positioned to expect a range of outcomes. For example, we reduced our fixed income assets during Q4 2021, mainly bonds, in anticipation of interest rate hikes causing bond yields to fall. On the flip side, during the pandemic we purchased growth stocks at the dip and achieved high returns when they rallied.
It should be noted that performance is not guaranteed and our clients' capital is at risk. We believe that investing with the aim to achieve long-term capital growth reduces exposure to short term volatility and typically leads to a greater return. We therefore conclude that a day-trading approach is not suitable when allocating clients capital.
If you have any questions in relation to this article, contact our Investment Team today who will be happy to assist you with your query.
This newsletter is for information only and represents the opinion of Reeves Independent Limited only and should not be seen as advice or a recommendation to act.
Note that investments can go down as well as up and you may not get back the full capital invested.