Average Stock Investor Holds for 8 Months (Part 2)
I’m still shocked that average stock investor holds for 8 months. How do you expect to compound and make money with the money you earned? Here we’ll continue our break down and analysis of what it takes to hold stocks for long term. In Part 1 of this article we covered just how difficult it can be to hold even the most successful stocks of the past 20 to 30 years. We broke down what it would have been like to hold Amazon for the last 20 years and Microsoft for the last 30. Even though these stocks held the power to create tremendous wealth and your initial investment was multiplied over and over it was still difficult (impossible?) to hold them.
How You Hold for the Long Term + Forever
In Part 2, we are going to show you how to do it – how to hold onto stocks for the long term. First we’ll show you a real-life example of holding stocks for longer than you’ve been alive (unless you were born before 1950), and then we’ll cover the tips and advice for holding on. To close out we’ll show you the corrosive effects of frequent trading with performance chasing and lastly we’ll cover our sure bet for you.
Getting it Won Since 1951
When I think of Warren Buffett I always think of GEICO insurance. Because he bought his first share of GEICO in 1951 and has never sold it. He continued to accumulate shares until finally buying 100% of the remaining shares in 1996 through his Berkshire Hathaway holding company. So for 69 straight years he has held stock in this company and never sold it. Not only has he held a position in this company for as long as I have been alive, but he began buying stock in this company 27 years before I was born! The scenario we played out with Microsoft in Part 1 could have been repeated twice back to back; or three times with holding Amazon for 20 years. This is long term investing. Actually its forever term investing.
Yes Warren Buffett is one of the best business and stock investors of all time. Few can parallel his long term storied success much less beat it. Some might beat him on the short term, but over the long term he always win out.
Mr. Buffet is Human
It is true that Mr. Buffett doesn’t always hold forever. He has sold off positions along the way and sometimes he sells for a loss. However, overall his performance has been so outstanding you give him a break and chalk it up to being human. So if the average stock investor holds for 8 months, how long does Warren Buffett hold for on average?
His top 10 positions by market value have been held for an average of 7.5 years. On top of this, he has held positions in Coca Cola since 1988 (32 yrs), Wells Fargo since 1989 (31 yrs) and American Express since 1993 (27 yrs).
Is there some correlation between holding period and wealth creation? YES!!
Berkshire Hathaway 1989 to 2020
Tips for Holding On
Here are some tips for holding on and improving your long term investing success.
- Always hold 7% to 14% of your portfolio in cash. You will feel reassured and have a cushion to tap into in case you need emergency money. You also have dry powder to snap up an opportunity or add to your position. Read more here
- Stop looking at your portfolio every day – the more you look at it the more likely you are to act and change something.
- Invest in companies you firmly believe will still be around in 30 years and limit your investment to $10,000. We have demonstrated that $10,000 in the right company over 30 years produces amazing results.
- Have more than $10,000? Then invest in the asset class or economic sector the stock belongs too. The sector will be around in 30 years. Now you have instant diversification in case the single issue goes under.
- Count the number of days you’ve been in the market with that stock. For a 30 year investment you need 10,950 calendar days in the market.
- Invest in a diversified portfolio of stocks and bonds and set aside up to 14% in cash; then use this cash hoard to look for stocks you want to bet on for 30 years. Keep the investment limited to $10,000 and then reload your cash hoard; then repeat.
- Over a 20 year or 30 year time horizon you will experience periods of sideways performance, under performance relative to other stocks, a few recessions and a crash or two. You cannot avoid this. It’s part of the price for admission. Read Point #1
- Consider investing in index funds and forgetting individual stocks. You know the index will be here 30 years from now and honestly the odds are stacked against you. Better to take the more sure bet.
Frequent Trading
Getting and staying wealthy rarely happens overnight. The lure and promise of quick riches is so incredibly powerful it often leads us to set unrealistic expectations of our portfolio which in turn leads to “adjustments” or “tweaks”. Instead, doing nothing is more often the right course of action after we’ve set our portfolio and asset allocation. Control what we can control and allow the magic of compounding returns flex its incredible muscle. Remember wealthy returns are measured and calculated in years not number of trades. In fact the more you trade the less likely you are to capture the returns you are seeking.
Look at this chart and explain to me why you would even attempt to invest outside of index funds; you can read the report here written by Berkeley University.
The Sure Bet
There are few sure things with investing; but one thing is for certain that the more you trade in and out of the market and continue hunting and searching the next hot stock the less likely you will succeed and the less opportunity for compounding returns to work for you. We started this article by showing you just how tremendously powerful AMZN and MSFT were at creating wealth for their early investors. But we also showed you just how nearly impossible it would have been to hold them straight for 20 or 30 years.
If tremendous wealth creation is your goal, then do the following:
- Set a diversified portfolio of stocks and bond ETFs and contribute regularly to it
- Hold 7% to 14% of your assets in cash for opportunities as they present in the future
- Start your own business doing something you love, interests you, and solves a problem others will pay to have solved.
If you’re happy to work, save, invest and pursue your hobbies do the following:
- Set a diversified portfolio of stocks and bond ETFs and contribute regularly to it
- Hold 7% to 14% of your assets in cash for opportunities as they present in the future
- Keep an eye out for a way to turn your hobby into a business and get paid for your passion.
Stay Safe, Stay Invested, Get Wealthy!
