Does Investor Outcome Increase as Investors Increase Their Hold Period?
We’ve all heard of the classic investing advice espoused by value investing practitioners: Buy a good stock and forget about it. Implicit in that advice is that time is a factor in generating returns. This article examines if that’s actually true and if long-term investing does indeed increase returns.
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”– Warren Buffett
There are those who believe that the right approach to investing is to buy high-quality companies and hold them for a long period of time, so they’ve had time to appreciate. Their thesis statement is that solid and well-run businesses will expand their earnings over time. So an investor’s job is to simply find these companies and hold their stock for, say, 30 years.
Their tool of choice: fundamental analysis and intrinsic value calculation. Let’s call this camp the ‘time in the market’ cohort. Does time in the market really yield better outcomes? Is there such a thing as too much time in the market? In other words, is there a sweet spot that maximizes yield? This article back-tests S&P 500 data to find out if long-term investing pays of.
Methodology to Evaluate Long-Term Investment Returns:
Using the S&P500 as a benchmark for the stock market, we model expected returns using a compounded annual rate of return for 1-year, 5-year, 10-year, and 30-year hold strategies. We evaluate the quality of returns both in terms of average returns and standard deviation of returns. The average return determines the kind of returns the investor can expect, and the standard deviation estimates the confidence around the returns.
|1928-2019||1 year||5 year||10 year||30 year|
Findings on Long-Term Investing:
Upon analyzing the data, we find that both the compounded annualized growth of return (return we make per year, normalized for the duration the asset was held) and the confidence around those returns improve as the duration increases. For example, the range of returns with a 1-year hold can range from -30% to +45%, with an average return of around 7.68%. The 5-year hold had an average annual return that was a little lower than 6,47% but had a much tighter band of returns.
In other words, there was higher confidence in the portfolio’s ability to deliver good returns. While not as wide as the 1-year curve, the data still had a +21% to -9% range. As we progressed from 5-year to 10 and 30 year hold periods, the range became more and more positive to a point where the 30-year number is fully positive. In other words, an investor who held the stock for 30 years was very statistically likely to see a positive return.
This fully supports our theory that long-term investing works. The longer the duration of the hold, the higher the quality and reliability of returns. So the next time you decide to do some investing, go long!