SHRINKING HORIZONS: Warren Buffett famously says his favourite stock holding period is forever. The same cannot be said for many other investors. The average holding period for US equities was only 10 months last year per our analysis (see chart). This is a mixed blessing. The gap between best and worst performing sectors last year was a record, and active funds bested passive for the first time in years. So being proactive can pay. But it often does not, incurring transaction costs, taxes, and can leave you out of the market – for where it is often difficult to return. This has become the pain-trade for many during the January rebound. Interestingly, retail investors often have a built in advantage here, with longer time horizons and investment goals.
RETAIL ADVANTAGE: Our global retail investor survey, of 10,000 in 13 countries, shows the vast majority taking the long view. This is an increasingly important foundation to markets. With US household equity ownership significantly above average. Only 12% retail investors measure their typical investment holding period in days or weeks. Whilst 63% see it in years or decades. This reflects the reasons they’re investing in the first place. The focus is on long term financial security (42%) and funding retirement (31%). Time is their best friend. S&P 500 history shows the chance of gaining on one day is a coin toss, but over 80% with a three-year holding period.
THE DATA: As a proxy for stock holding periods we divide stock market value by turnover. This saw a peak at 5 years in the US four decades ago but fell to under a year more recently. We see similar falls across global equity markets. This is part structural, with trading now cheaper and more machine-driven. But also cyclical, as sell-offs often drive anxiety, repositioning, and higher volumes. The 2008 global financial crisis saw US holding periods fall to only 3 months. Similarly, the average US mutual fund holding period is 2.5 years (measured by its turnover ratio), with a huge range. From ‘forever’ funds that never trade, to others with holding periods of only 8 days!
All data, figures & charts are valid as of 08/02/2023