Posted by & filed under Behavioral Finance.

Is Buy & Hold dead? Is the market going to dive underwater? According to the behavioral finance signals the market has recently produced, we have a different view on the upcoming years.

In the last post, I wrote about the key aspects of the current situation within the Financial Industry, and why there will be a need to reinvent finance, starting from behavioral finance and innovation technology.

Now, the time has come to talk about the way we see the future.

Let’s start from a brief introduction to the market, which is made up of 3 main parts:

  1. Smart Money investors.
  2. Institutional investors.
  3. The Public.

According to behavioral finance principles, the converging or diverging perceptions of these different kinds of investors create the key behavioral movements (and the resulting opportunity to anticipate them through specific technology and expertise).

Behavioral finance: bubble chart

Source: Dr. Jean-Paul Rodrigue, Dept. of Global Studies & Geography, Hofstra University

Especially during the last years, market sentiments (often in contrast with the traditional market fundamentals) have increasingly influenced the macroeconomic environment, causing:

  • Substantial short term fluctuations.
  • The increase of “market consensus”.
  • Recurring “Boom & Bust” cycles.

Therefore, the following question has finally popped up in investors’ mind: is the traditional Buy & Hold strategy dead?

Well, YES and NO: if we consider B&H in it’s common static manifestation, then yes, this strategy is nowadays up to no good. But if we consider B&H as a “dynamic” investment strategy applied not to single stocks but to entire universe of asset class, then this strategy is far from dead. It is actually the way to go to achieve a profitable asset management strategy.

And here, the ability to anticipate behavioral changes is of utmost importance.

Now, how this translates into our view on the future?

Well, let’s take a look again at the all time graph of S&P, and compare it with the previous one (phases of a bubble):

Behavioral Finance: S&P 500 historic

The conclusion here is that, in contradiction with many existing pessimistic views on the future of the market, we see the potential for the opening of a new Long Term Greed, which could occour in a matter of months and after a correction.

See you next week: stay innovative, stay social, rethink finance with us!

Alberto Ravandoni

Marketing & Communication at Quantesys
To effectively capture the attention, you have to create valuable content, spread it toward the right audience at the right moment and with a pinch of irony.