Sticking to buying and holding robs investors of alpha.
Instead, they should rebalance periodically to earn higher returns, says Adrian Banner, CEO and CIO of INTECH Investment Management. He manages the Renaissance U.S. Equity Fund.
“If you systematically buy low and sell high, you can capture a trading profit that doesn’t depend on individual stock movements, but rather on the volatility of stock prices,” he adds.
As a result, “you can end up with a source of alpha that a buy-and-hold portfolio, like a cap-weighted index, just cannot access [because it] doesn’t trade [actively].”
The fundamentals of quality stocks don’t usually change quickly, even though their prices may. Such volatility is due to “the uncertainty of investors, [because] no one’s sure what the true valuation of a company is,” says Banner. “Even if a stock is [expected to] beat the index, it’s not going to go up every day.”
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Price dips benefit investors since they present buying opportunities, he adds. Clients can “use this bumpiness to [their] advantage by systematically buying the security when it’s below the trend line and when it’s gone down temporarily due to the fluctuation.”
Also, they can sell more when the opposite has happened.