How Long is the Average Holding Period?
If you’ve felt that Mr. Market has gone crazier over the years, you may be right.
In the past decades, the average holding period of stocks has gone down from several years to merely months.
In fact, according to Reuters and New York stock exchange data, during the 1950s and 60s investors held their stocks for about 6 to 8 years. After 2020, the average holding period has been only 5.5 months.
Think about it. You find a great company and buy the stock only to sell it six months later. Usually, there’s not much that happens in six months. The stock price might go up or down, but fundamentally, the company is most likely the same.
This would indicate that nowadays, fundamentals matter less in the stock market.
Considering how the world has changed in the past 60 years, it’s not surprising that the stock market has also undergone a major change.
The change has been subtle, but the results are nothing but. So what exactly are the reasons behind this major development?
Why Has the Average Holding Period Declined?
There are several reasons why the average holding period has reduced significantly but the main driver behind everything is technological advancement.
Easier Transactions
Back in the day, you had to message your broker if you wanted to make a transaction. Because of the limitations in technology, the time between placing an order with a broker and finally making the transaction could be quite long.
Also, transactions used to be expensive due because of high commission costs due to low competition between brokers.
Today, things couldn’t be more different. Technology has enabled investors to make an unlimited number of transactions per day from everywhere on Earth, usually with low fees or even without commissions. Not to mention the possibility of using a fully automated trading system and the existence high-frequency trading.
The current system seems to be built to encourage frequent trading by a wide selection of different online trading platforms across different markets.
The human mind tends to gravitate toward the easiest way of doing things. We seem to have a quite low tolerance for resisting the easiest way out.
In investing, it’s harder to resist the urge to buy or sell the easier it is to do.
Sometimes it would be best to take a day or two before executing a transaction. Luckily, there’s nothing forcing you to trade constantly.
For a long-term investor, it pays to be patient.
Social Media
Nowadays, it’s easier to connect with other investors than ever before, which can be a good and a bad thing.
On one hand, we can learn from each other and share knowledge and information in a way that was not possible before.
Then again, there have been certain by-products like increased herd mentality and fear of missing out, and even more extreme phenomena like r/wallstreetbets.
The trick in comparing yourself to others is to first find out whether you’re playing the same game. As a long-term stock investor, it’s not wise to compare your portfolio performance to someone who trades cryptocurrencies.
When we start to feel bad about our returns, we tend to make hasty decisions and take more risks.
For example, when cryptocurrencies began to be a household term and profits were through the roof, there were investors who sold their shares of stable companies to buy cryptos to gain short-term returns.
It’s easier to invest in the long term when you don’t compare your short-term returns to others.
In my opinion, the idea of social media is to learn new ideas and be critical of your own actions. This can be done by looking at what someone else has done better and checking whether you can apply the same principles in your own investment plan.
The Amount of Information
Never in the history of the world has there been as much information immediately available as there is today. For investors, it’s now more important than ever to learn how to manage information.
The sheer amount of short-term information impairs our ability to make long-term decisions. More information does not equal better information.
Checking stock prices several times per day starts to warp your perception of time – long-term starts to become short-term.
Tracking short-term market movements encourage hasty decisions. If you believe your analysis of a company is correct and believe it to be a good long-term investment, there’s no need to follow the stock price on a daily basis.
Sometimes the stock price can rise or fall considerably in one day without any change in the company’s fundamentals.
The easier transactions and amount of short-term information encourage an investor to take fast losses and even faster wins.
The Rise of Instant Gratification
If there is one thing investing requires, it’s patience. You can’t achieve tremendous results overnight. For example, if you invest regularly in index funds, it takes time to achieve compounding returns.
One of the greatest challenges for a long-term investor is to avoid succumbing to instant gratification.
Nowadays, society encourages us to develop a mindset of getting everything immediately.
I firmly believe that the longer the attention span and a disciplined mind one has in everyday life, the better chance there is to succeed in investing.
Long-term investing requires delayed gratification, which means that the successful investor is able to forego short-term temptations for long-term results.
Personally, I’ve struggled quite a lot with developing patience, which is why I’ve found it helpful to constantly put things in perspective. For example, when you adopt a long-term strategy, you should always remind yourself that your investment time frame is possibly decades, not months. Therefore you don’t have to care about volatile markets.
Consequences of Short Stock-Holding Periods
So, as we have seen, shorter holding periods are mostly the result of technology that is affecting our perception of time.
Although there’s no single rule for how long to hold your stocks, it’s safe to say that shorter holding periods increase your risk level, especially timing risk.
Moreover, if you sell your stocks as soon as they have gone up, let’s say 50%, you will always miss the biggest returns in companies that could’ve offered a 100% or a 1000% return in the long term.
The greatest returns are achieved through compounding, and gradually accumulated returns require time.
When you make more trades, you can only achieve compounding by trading successfully for a long time, which means that the possibility of making bad trades is greatly increased.
Achieving decades of success as a short-time investor that makes a lot of trades is extremely hard.
If you do make decent long-term returns by holding stocks for a short time, there’s obviously nothing wrong with that. What I want to make clear is that it’s a lot harder than one might think.
The thing is that long-term investing offers the best chance for satisfying returns. The probability of profits rises the longer you hold your investments. When you have longer holding periods, you have to make fewer good investment decisions.
If you trade a lot, you also have to be right a lot.
The way I see it, the very basic idea of investing is to find a company that has a great potential for success, buy a part of it and let the company keep growing and enjoy the profits.
When you buy a stock and sell it quickly to pursue short-term results, you start to become a speculator instead of an investor. This is when you miss out on compounding and all the future success a great company would offer.
So, in essence, shorter holding periods will diminish the probability of making decent returns in the long term.
Summary
So, the average stock holding period has fallen dramatically from several years to less than six months with technology being a significant contributor.
Although the research mentioned in this article was based on the New York stock exchange, the average holding period has shortened worldwide.
The easier it is to make trades, the more tempting it is to trade. Combine it with the endless supply of information and possibilities at our disposal, holding stocks has become a lot harder than it was before.
Although there is nothing wrong with having different investment strategies, the longer investors hold shares, the higher the probability of making exponential returns.
Sometimes the buy-and-hold approach is more effective simply because it decreases the probability of making bad trades.
It’s always worth remembering that the main idea in investing is to achieve satisfying returns no matter the strategy. Shorter holding periods do not go well with long-term investing, but they don’t necessarily mean worse results when applied with other strategies.
