Stocks For Rent: Holding Periods At 60-Year Lows
Thanks to advances in smart phone technology and the ubiquity of internet connections, investors are able to buy and sell shares of companies from anywhere in the world at the swipe of a finger. As a consequence of this convenience, the average holding period of a stock is at all-time lows. Today, the average investor will hold an individual stock for only four months, a far cry from the 1960s, when the average holding period was over eight years. Why is over-trading so potentially damaging to investors’ long-term performance? A few reasons:
Difficult and costly to time the market
A recent study from Index Fund Advisors shows that over the last twenty years, being out of the market on the five days with the biggest daily gains would have cost an investor over 2% per year of performance. Without the benefit of hindsight, identifying those five days is an impossibility that underscores the need to remain invested in all periods.
All else being equal, an investor with an average holding period of four months would spend over 15x as much money on trading as an investor with an average holding period of five years. Even with the benefit of the low trading costs offered by discount brokers, over-trading can eat away at investment returns.
For taxable investors, there is a significant advantage to holding on to your stocks longer. Holding a stock for greater than 12 months triggers long-term gain status, which results in a 20% tax rate for those in the highest tax bracket. If the same investors hold a stock for less than 12 months before selling, the tax rate on the gain would be 39.6%. As a result, short-term investors need a 1.3x higher pre-tax return to keep pace with long-term investors.
At First Fiduciary, having a long time horizon is a key piece of our investment process. While it may be tempting to change investment strategies based on short-term market movements, we’ve achieved success by sticking to our knitting. We invest in high-quality companies trading at attractive prices. Then, we let these industry-leading companies compound shareholder value over a period of three to five years or longer. We would consider selling when a stock becomes expensive, the thesis has negatively changed, or we find better opportunities. Throughout First Fiduciary’s history, our disciplined commitment to long-term investing has allowed our clients to efficiently generate good performance on a risk-adjusted basis.