Holding Periods For Stocks Have Been Shrinking. So It May Pay To Take The Long View

Holding Periods For Stocks Have Been Shrinking. So It May Pay To Take The Long View
Paul Allison, CFA

about 1 year ago1 min

Mentioned in story

Warren Buffett has famously said that his favorite holding period is forever. But today’s market players don’t seem to be fans of his style: the average holding period for US stocks is just six months, down from eight years back in the 1960s. There are a couple of reasons for this. Firstly, there’s been rampant growth in high-frequency trading, which uses an algorithmic approach to perform quick-fire buying and selling in a fraction of a second. By some accounts, it now makes up around 50% of US equity trading volumes. Secondly, there’s been a sharp improvement in retail trading systems, with commission-free, easy-to-use apps now widely available. In the olden days, you’d have to find a friendly broker, a telephone, and be willing to fork out a hefty commission to buy or sell shares.

The result has been more trading, more often. That said, if you’re prepared to keep your eyes firmly fixed on the long term, the market's new impatience might be to your advantage. See, many investors are making decisions with a shorter time horizon in mind, and that can mean gravitating toward the firms that are firing on all cylinders in the here and now. There’s nothing wrong with investing in good-performing companies, of course, but today’s winners can get overhyped while those struggling with near-term issues get overlooked. But, if you’ve got a long enough time horizon and you’re buying decent companies, you’ll find most issues tend to get ironed out in the goodness of time. And while the market’s purring over today’s superstars, you could unearth some real long-term gems.



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