This is how long the average investor holds onto their shares

“Buy and hold” is the stock strategy most favoured at The Motley Fool — to allow quality companies to grow over the long term regardless of short-term market movements.

But it seems long-term investing is starting to fall out of favour.

Whether it’s because of a change in investor mindset or the advancement of technology, it seems we’re becoming more impatient with our shares.

According to Visual Capitalist, the average holding period of shares on the NYSE was just 5.5 months as of June 2020.

In the 1950s, the average holding time of a stock was eight years.

Why are we selling our shares so fast?

Cynics and market veterans would immediately blame the rise of meme stocks on this quest for a quick buck.

The internet and social media allow fervour for a particular business to whip up particularly quickly, regardless of its fundamentals.

A crowd of buyers pushes the share price up, then a small minority sell out for fast profits.

“Long-term investing has much less to offer in terms of excitement,” said Visual Capitalist writer Marcus Lu. 

“The recent r/wallstreetbets saga is an example of how the stock market can become sensational and fad-driven.”

But it’s not just very modern phenomena causing investors to become impatient.

Visual Capitalist pointed out a number of structural technology changes have been happening over many decades, enabling faster buying and selling.

“For example, in 1966, the NYSE switched to a fully automated trading system,” said Lu. 

“This greatly increased the number of trades that could be processed each day and lowered the cost of transactions.”

Indeed, in 1982 there was a daily average trading volume of 100 million, but by 2020 that had increased tenfold.

Automated exchanges also enable high-frequency trading (HFT). This is when computer algorithms buy and sell shares at rapid pace.

“HFT represents 50% of trading volume in US equity markets, making it a significant contributor to the decline in holding periods.”

Information is free and readily available

Democratisation of information is also a contributor to more active stock trading.

It was only in the 1990s when one had to pay a fee to receive hard copies of financial statements, days or weeks after the results were announced.

Now data on publicly listed companies is readily available free online. And investors can immediately act on the information through internet brokers.

Visual Capitalist also indicated that the lifespans of companies themselves have shortened.

“In 1970, companies that were included in the S&P 500 Index (SP: .INX) had an average tenure of 35 years,” said Lu.

“By 2018, average tenure was down to 20 years, and by 2030, it’s expected to fall below 15 years.”

The shorter life expectancy leads to two outcomes.

One is that it’s a greater incentive for investors to chase short-term returns, as they don’t know when it will all come to an end.

The other result is that there is a greater turnover of members that make up indices, contributing to shorter holding periods.

The post This is how long the average investor holds onto their shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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