How long does the average investor buy and hold stocks? Inquiring minds want to know. Throughout my 26-year investment management career, I must have posed this question to other investors dozens and dozens of times. Why? Because I’m always interested in investor perception versus reality. You see, nine out of ten times I’ve asked that question, I get roughly the same answer—somewhere between five to ten years, with a smattering saying ten years or more. That’s what many investors say because it’s reflective of a sound, long-term investment strategy. But it doesn’t remotely reflect reality.
In fact, the average holding period is about 5 ½ months as of June 2020, down from 8 ½ months as of June 2019. That’s according to Reuters, who’s been tracking New York Stock Exchange data for years. The average holding period for U.S. stocks has been shrinking for decades, driven in large part by high-frequency, programmed trading that now dominates trading volume in the major stock markets. By definition, programmed trading shortens the average holding period because it focuses on short-term price-movements rather than underlying company fundamentals. Over the last couple of years, increasing market volatility has accelerated the trend led by anxious investors not wanting to sit on investments for too long.
Hope is Not a Strategy
It’s a dangerous trend that, for average investors, invariably leads to underperformance. The truth is, while many investors believe they’re investing in the market, they’re actually speculating. They don’t realize they’re active participants in the Greater Fool Theory. The theory says you are a fool for paying a certain price for a stock, hoping that a “greater fool” comes along and buys it at a higher price regardless of a company’s fundamentals or the current market condition. While that can and does happen, the changing winds of the market work against you more often than not.
Most investors (at least the ones I asked) will tell you the average holding period is or should be five to ten years or more because they know that is how you outperform the market across equity market cycles. I think many investors may start out with the same long-term conviction, but they are overtaken by a short-term myopic focus on the headlines of the day and how the herd is reacting. They allow their emotions to guide their investment decisions which invariably leads to bad outcomes.
The Question Is: How Long Should You Own a Business?
What ultimately drives stock performance is business performance (i.e. earnings). When you invest in a company, you become a partner in the business with the expectation of sharing in those earnings, either through stock appreciation or dividends, or both. If you apply a price discipline when investing in high-quality companies, you can capture low-risk opportunities that lead to long-term outperformance. In many cases, you have to wait a while to allow the company to execute its business plan and compound its growth.
For more than 100 years, the stock market has rewarded patient and disciplined investors. When asked how long investors should hold a stock, Warren Buffet replied, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
That’s not to say you should never sell a stock, just that you should have long-term conviction when buying it. Our effective average holding period is more than ten years because that is the amount of time shareholders can expect to reap the total rewards a high-quality company can produce. For most investors, the total returns generated from that strategy will consistently outperform the hit and miss short-term bets of speculators who buy and sell stocks faster than the change in seasons.
