How often do you trade your stocks during a year? Do you turn over your portfolio an average of once a year, twice a year or a dozen times a year? In this age of super-fast computers that are programmed to trade in nanoseconds (one billionth of a second), does frequent trading beat holding stocks long term? My opinion is no—more trading does not improve your returns. Holdings stocks long term does.
I recently attended the CIRI (Canadian Investor Relations Institute) Conference in Quebec City, Canada. The main topic for the conference was “Creating Value for the Long Term.” Companies in Canada are now being urged to share their long-term strategies and goals with investors rather than talk strictly about short-term financial results.
The issue is that companies have been focusing their attention on meeting or beating quarterly estimates rather than concentrating on marketing, researching, and developing new products and services. The pressure on companies to produce better quarterly results now and disregard long-term consequences is hurting companies and investors alike. Hopefully, CIRI’s push to encourage Canadian companies to emphasize their long-term plans will enhance investor experiences (higher returns), and then spread to U.S. companies as well.
The current emphasis on quarterly financial results and the media hype created by each and every tidbit of information leads investors to hit the sell button too quickly. Unfortunately, the “sell now and ask questions later” world that we live in affects professional investors as well as individual (retail) investors.
I believe the trend by companies to release more information about longer-term strategies will encourage investors to buy and hold stocks for longer periods of time. By holding stocks long term, the result will very likely be more consistent profits.
Holding Stocks Long Term Beats Selling too Soon!
I’ve previously written about studies that confirmed what I have been preaching for decades. Most investors sell stocks too soon. Mark Hulbert, founding editor of the Hulbert Financial Digest, recently compiled a huge database to find out how the frequency of portfolio transactions impacted performance results. He gathered 30 years of history from hundreds of investment advisories.
For each advisory, Mark Hulbert and his staff made a comparison of how the portfolio actually performed in each year compared to how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year with no transactions.
Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during the year, focusing instead on holding stocks long term.
Furthermore, in EVERY year, the portfolios holding stocks long term, as a group, performed better than the portfolios that traded during the year.
An additional study lends credence to Mark Hulbert’s findings. Two finance professors in California studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.
The study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been far better off had they done nothing.
How Often Should You Trade Your Stocks?
There is no answer, because it all depends on what type of stocks you are buying and selling. I am a conservative investor, so I tend to hold onto my stocks for about 24 months, on average.
The data and studies seem to suggest that the longer you hold the stock, the larger the profit. I advise using sell targets with the goal of achieving maximum gains within two years.
And holding stocks long term has another benefit—dividends! A company’s ability to continually pay dividends provides concrete evidence that the company is performing well. Also, rising dividends indicate that management and the board of directors expect the company to perform well during the next several years.
The Mark Hulbert and professors’ studies provide clear evidence that most investors, even professional investors, sell too early and leave profits on the table. This is understandable. So-called “sell rules” often fall short of their intended goals.
The current volatility in stock markets around the world is an excellent example of investors’ penchant for selling without thinking things through.
Today’s high-pitched emotions have produced a barrage of over-reactive selling—and the days ahead are likely to provide some excellent opportunities to buy leading stocks at bargain prices.