Longer-Term Investing: The Long & Short of It
Renowned investor Warren Buffett is well known for saying, “our favourite holding period is forever — When we own portions of outstanding businesses with outstanding managements, we expect to hold them for a long time.”1 Yet, despite his words of wisdom, consider how the average holding period for stocks has changed over time. For the NYSE, back in the 1950s, the average holding period was 100 months, or 8 years. By 1990, this dropped to 26 months. And today, it is closer to 5.5 months!
What has caused this decline? Technology has been one of the biggest drivers. Up until the 1970s, trading systems were not automated, which limited the number of trades that could be processed each day. The chart below shows how trading volume has grown over time. Technology has also significantly lowered the cost of transactions. And, with the connectivity of the internet, it has enabled investors of all kinds to trade, with information widely distributed and easy to access.
Yet, history shows that when it comes to investing, the longer your ability to focus, the better. Why? The variability of equity market performance smooths out substantially as the investing period grows. The graph shows the range of outcomes for the best and worst annualized returns of the S&P/TSX Composite Index (not including dividends reinvested) from 1970 to the start of 2023. These figures were calculated using rolling monthly returns. Over one-year periods, the variability is substantial: historically, you could have experienced a variation in annual returns of between -42.1 percent and +79.0 percent! However, as the time horizon extends to decades, the range of outcomes narrows significantly and the likelihood of negative returns also diminishes.
During volatile times, for some investors it may be difficult to maintain a longer-term view. But, the long and the short of it is that by extending a time horizon, historical probabilities continue to favour the long-term investor.
1. https://www.berkshirehathaway.com/letters/1988.html; 2. New York Stock Exchange data from https://www.visualcapitalist.com/the-decline-of-long-t
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