Hi Sweetheart Now that youre taking a finance class I was ho

Hi Sweetheart, Now that you\'re taking a finance class, I was hoping you could settle a disagreement that your father and I are having. We are considering buying stock in General Electric (GE). We agree on what the dividends will be in the near future and how risky the company is, but I liked to hold stock in our portfolio for just a couple of years and your dad likes to hold for 10 years or more. Based on what you\'ve been learning about valuing financial assets, do you think we should be able to agree on a fair price for the stock given how we can\'t agree on how long to hold the stock? That is, should our intended holding period affect what we should be willing to pay? I hope to hear from you soon! Also, when are you coming to see us? It has been too long! Love, Mom

Solution

Dear Mom,

Good to hear from you after a long time. Hope you and Dad are doing fine?

With regards to your argument, yes, the holding period will decide the price you pay. As a thumb rule, equity markets are very volatile in the short term whereas the volatility subsides as the holding period increases. So, if you hold for 10 years, you basically not have to worry too much about the purchase price since the long term returns are not based on market timings. But if you hold it only for a few years, the price you pay will be very important. You may want to buy when there is a steep correction or a general sense of fear in the market and then hope for the price would come back to normal. In finance parlance, \"Buy low, sell high\". So, in conclusion, I would suggest you both to agree on a time frame that you want to invest in and then based on the time horizon make your purchase decision.

Thanks, I am hoping to come over the next weekend to see you!

Love,

Son/Daughter