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What is your investing time horizon?

February 9, 2012

One of the first steps to establishing an investing/trading strategy in the stock market is to determine your preferred investing time horizon. Without doing so, it’s impossible to lay down basic ground rules for your strategy, such as how long you will seek to hold each stock or ETF position.

We have laid out the four main investing time horizons below, and summarized the pros and cons of each:

Traditional “buy and hold”

  • Holding period of several years to decades
  • Balanced portfolio of 20 or more stocks
  • Based on fundamental analysis
  • Pros
    * Very passive, minimal work required
  • Cons
    *
    Limited to no flexibility
    * Potentially large drawdowns and long periods of time with no appreciation
    * Dependent on market to always move higher, with no consideration of trend

Position Trading

  • Holding period of 6 months to several years
  • Narrow selection of stocks with concentrated positions
  • Pros
    * Designed to achieve big gains from riding strong trends
  • Cons
    * Large drawdowns in choppy markets
    * High volatility in profit and loss (P&L)

Swing trading (near and intermediate-term)

  • Holding period
    • Near-term trades are several days to weeks
    • Intermediate-term trades are 3 to 6 months
  • Flexible, well-balanced strategy with solid reward-risk characteristics
  • Pros
    * Strong risk control due to market timing
    * Flexible enough to take advantage of shorter-term trends in both directions
  • Cons
    * Active management requires more monitoring and solid market timing

Daytrading

  • Holding period of several minutes to 1 full day
  • Takes advantage of intraday price and volume momentum in the markets
  • Pros
    * Extremely risk-averse due to no overnight exposure and risk of outside events
  • Cons
    * Requires very active management, sitting in front of monitor all day
    * Physically and mentally demanding (requires solid reflexes)
    * Quite time consuming, only suitable for full-time traders

Determining your preferred investing time horizon is a personal decision based primarily on one’s own comfort levels with risk and patience. For us, swing trading in the primarily short-term time frame is our best fit strategy because it gives us the maximum potential for profits, while putting our capital at the least amount of risk. In The Wagner Daily newsletter, for example, we seek an average holding time of 1 to 3 weeks for each stock and ETF trade we enter.

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