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Research finds the average holding period for stocks has gone from eight years to eight months
Thursday 04 May 2017 Author: Daniel Coatsworth

What’s the longest you’ve ever held a stock? The world has become impatient, people demand information in an instant or shop online and expect same-day delivery. This desire for instant gratification is also spreading to the investment world.

Increasingly I see people on social media like Twitter discussing the daily movements of their portfolio. Many of the people I follow seem to be serious investors who are very knowledgeable about the subject matter. It therefore seems odd that they are being so critical about short-term performance.

If more people are checking prices on a daily basis, does that mean a higher turnover rate for stocks and funds in an investment portfolio? Yes is the answer.

Eight years to eight months

A white paper published by US investment manager MFS in 2016 looked at investor behaviour. It cited research by investment data specialist Ned Davis which showed the average holding period for shares on the New York Stock Exchange had fallen from eight years in the 1960s to just over eight months at the end of 2015.

It would be fair to assume the actions of US investors are similar to people in the UK.

MFS’ paper cited research by Morningstar which found fund managers had also become more impatient, turning over companies in their portfolios every 1.56 years – perhaps driven by financial incentives.

A report by the CFA Institute found 43% of fund managers receive more than half their pay and bonus based on their annual performance.

MFS suggested some managers were taking excessive risk to beat their benchmark in order to hit bonus targets, yet some of the risks may not be appropriate for the style of fund originally presented to the end investor.

As for retail investors, too much information on the stock market is blamed for people being too short term in their thinking. MFS cited quarterly earnings reports and the volume of media comment as being key sources of ‘noise’ that an investor must digest and filter.

Selling to fund new purchase

What happens if you find a great opportunity and don’t want to miss out? You as a fund manager or retail investor would have to make a hard decision if you don’t have spare cash to invest.

Indeed, some fund managers (particularly those running closed-end funds), and no doubt retail investors, happily sell stocks in their portfolios when they need to raise cash to fund a better idea. That could be a risky strategy, as you might have already had a perfectly decent stock to own for the long term.

Making money with old friends

With this in mind, it was refreshing to hear comments from fund manager Terry Smith at the recent Fundsmith Equity (GB00B41YBW71) annual shareholder meeting.

He said ‘we are making money with old friends’, referring to some of his best performing investments in 2016 having been in the Fundsmith portfolio since inception in 2010.

The next time you feel compelled to replace a stock in your portfolio, write down a list of reasons why you no longer want to own the outgoing asset.

If you cannot justify why the existing investment should be sold as much as you justify why the new one should be bought, then perhaps you are making the wrong decision.

DISCLAIMER: The author has a personal investment in Fundsmith Equity

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