Renowned investor Warren Buffett is well known for saying, “our favourite holding period is forever. When we own portions of outstanding businesses with outstanding managements, we expect to hold them for a long time.”1 Yet, despite these words of wisdom, consider how the average holding period for stocks has changed over time. For the NYSE, back in the 1950s, the average holding period was 100 months, or 8 years. By 1990, this dropped to 26 months. And today, it is closer to 5.5 months!2
What has caused this decline? Technology has been one of the biggest drivers. Up until the 1970s, trading systems were not automated, which limited the number of trades that could be processed each day. The chart below shows how trading volume has grown over time. Technology has also significantly lowered the cost of transactions. And, with the connectivity of the internet, it has enabled investors of all kinds to trade, with information widely distributed and easy to access.
Yet, history shows that when it comes to investing in the stock market, the longer your ability to focus, the better. Why? The variability of equity market performance smooths out substantially as the investing period grows. The graph (top, right) shows the range of outcomes for the best and worst annualized returns of the S&P/TSX Composite Index (not including dividends reinvested) from 1956 to the start of 2023. These figures were calculated using rolling annual returns. Over one-year periods, the variability is substantial: historically, you could have experienced a variation in annual returns of between -35.0 percent and +38.4 percent (and if you were to use rolling monthly returns, the analysis shows that the variance would be even greater!) However, as the time horizon extends to decades, the range of outcomes narrows significantly and the likelihood of negative returns also diminishes.
During volatile times, for some investors it may be difficult to maintain a longer-term view. But, the long and the short of it is that by extending a time horizon, historical probabilities continue to favour the long-term investor.
Let’s also not forget that equities continue to be one of the best asset classes in which to generate wealth and beat inflation over time. We could choose to invest in other assets like low-risk, fixed-income investments to avoid this volatility, but then we would also forego the potential returns over the longer term. Just how much of a difference can this make over time? The chart (right) looks at the period from 1975 to 2022, which includes times of higher inflation and interest rates. History has shown that being invested in equities over the longer term has been a good way to stay ahead of inflation. Equities also receive favourable tax treatment: capital gains are taxed at a lower rate compared to interest and other income.
A Parting Thought: While we continue to endure more challenging equity market times, maintain a longer-term perspective. Markets have always been cyclical and better days lie ahead. Equities continue to be an important part of building wealth for the future. Continue looking forward!
Source: https://www.visualcapitalist.com/the-decline-of-long-term-investing/
Equities: S&P 500 with dividends reinvested; Bonds: 50% 10-year Treasury, 50% Baa Corporate Bonds; Cash: 3-month T. Bill. *Does not include impact of taxes.
Source: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
1.https://www.berkshirehathaway.com/letters/1988.html;
2. New York Stock Exchange(NYSE) data fromhttps://www.visualcapitalist.com/the-decline-of-long-term-investing/
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