03 Apr How to Choose your Investment Time-frame
We know that there are different time-frames in trading and investment. However, most people invest without knowing how long they are going to hold and when they have to exit. It is often disastrous to the capital when one enters and exits without understanding his time-frame and how he should manage when market conditions change. He would panic and react in a way unfavourable to his position. Hence, it is important we define our investment time-frame and stick to it, and use the suitable tools to evaluate our investment. In fact, we often differentiate trading and investment by time-frames. Usually, trading comes to mind as a short term activity and investment as a long term activity. It is true to a certain extent. If we take a closer look, we can define the time-frames more specifically.
Time-frame – Opens and closes trades within the day.
Concept – Scalping, making money via small price movements and market gyrations. Use large capital to gain a decent profit from small changes.
Good – You can make a steady and consistent income from trading. Most professional traders trade intraday.
Bad – You have to trade your time for money. To make a decent amount of money daily, you would need a huge capital to trade. You must be able to handle the sum of money and maintain your focus on the market for the entire trading period. If you have no passion for this business, you should not intraday trade as it is much more time consuming and energy demanding task as compared to other trading/investment time-frames.
Time-frame – Days to Weeks to Months to close the trades.
Concept – Profit from medium term price movements or market ‘swings’. Buy during market retracement, or buy stocks that are trending strongly.
Good -Less time required to monitor the market. Allows the market to move for a period of time. Do not need a big capital to make a decent profit from price moves.
Bad – You would need more price movement to take profits. Income would not be consistent as compared to intraday trading. We know that market does not trend most of the time, so you have to have great patience to wait for opportunities. There will be months you have no activity and no profits. You cannot force trades and expect the market to pay you. And if you miss those few opportunities, your profits will be severely affected. If you do swing trades, it is not advisable to look at your profits monthly. An annual assessment would be more sensible as there should be a few trends available for you to capture the profits.
Time-frame – 5 to 7 years to realise profits.
Concept – To buy after market crashes, where asset prices are excessively depressed. These assets are undervalued and you can buy cheap. You will exit when assets are over-valued excessively during market euphoria.
Good – You would be able to comfortably make multiples on your investment. 2-3 times your investment would be common and easily achieved.
Bad – Firstly, when the market is crashing, you would not have the guts to buy even though you know it is undervalued. In your mind, you will be thinking the market will go down lower. It is very hard for you to pull the trigger as fear and uncertainty are dominant. Secondly, even if you are able to invest, you may not be able to see any profits for the first few years. This is because market recovery is slow after a crash. Patience is needed and time will prove you right. Thirdly, you must be able to take big drawdown up to 20% to your capital during market corrections. As we know that the market does not go up in a straight line, you will be experiencing a few corrections testing your patience and confidence.
Buy and Hold
Time-frame – Forever as long as the business is still doing well.
Concept – Your aim as a buy and hold investor is dividends and cashflow, instead of capital gain through asset appreciation. Like Warren Buffett, you would want to buy a business that is a cash cow that generates very healthy cashflow for you.
Good – It is a golden goose and you just need to collect the golden eggs for the rest of your life! This is real passive income – Other people manage and run the business, you just collect profits.
Bad – There are very, very few golden geese out there. You have to do lots and lots of homework to find them. Even when you find them, you may find some companies are not listed and hence, quite impossible for you to buy the shares. Unless you have access to large amount of capital, you can buy out the private companies like what Buffett do. Secondly, during market crashes, your investment can drop as much as 50%.
There are many books on Warren Buffett methods. But ask yourself, are you a buy and hold investor? If not, do not use Buffett’s methods! The worse is: If a person buys using swing trading method and treats it as a buy-and-hold asset, he can never make any profit. It is important to know your time-frame and enter and exit using the same approach.
Now that we have a common understanding on the time-frame, we need to address ask ourselves some questions to find out which time-frame is the most suitable for ourselves.
Which time-frame suits your current life and schedule?
Does your current lifestyle allow you to spend your days to day trade? Does your schedule allow you to do swing trades? Like most people I have a job and hence, day trading is not possible. I can only do Cycle investing and Swing trading. Then again, is day trading something that I want to do? I don’t have the inclination at this point in time.
Which time-frame suits your psychology and personality?
You have to focus on the bad things associated with each time-frame and ask yourself honestly if you can handle the worst. Can you take large drawdowns of up to 20% to your capital as a cycle investor? Can you wait patiently and do nothing when market is not trending as a swing trader? Are you willing to spend your rest of your life day trading as an intraday trader?
What would be your time-frame?