In an era where an investor’s average holding period for a share has been whittled down from seven years in the 1940s to less than six months currently, it might be logical to think that having a short time horizon when investing in shares would be the right thing to do. But, that can’t be further from the truth. My colleague Chong Ser Jing had recently noted that over-trading is one of the top reasons why individual investors underperform the market. Put another way, it is the patient act of holding on to your investments for the long-term…
In an era where an investor’s average holding period for a share has been whittled down from seven years in the 1940s to less than six months currently, it might be logical to think that having a short time horizon when investing in shares would be the right thing to do.
But, that can’t be further from the truth. My colleague Chong Ser Jing had recently noted that over-trading is one of the top reasons why individual investors underperform the market. Put another way, it is the patient act of holding on to your investments for the long-term which can help increase your odds of investing success.
Here are a few more thoughts from me on why having patience is so important when it comes to investing:
1) Being patient allows you to form your own perspectives on an investment. By taking your time to study a company for months (or even years!), you can be confident that whatever investment you make is based on a logical study of facts, and not based on the whims and fancies of your emotions.
2) Being patient with your investments allows you to fully utilize the power of compound interest. Ser Jing had once given a great example of how compound interest does wonders when given enough time:
“An investor who’s 20 currently and willing to work hard to find bargains might not be as great as Buffett, so let’s notch down his returns to say 12% per year. With an initial capital of just S$1,000 and without any added funds, his returns would have been somewhat pitiful in the initial years – S$112 in the first year, S$113.44 in the second year and so forth. In fact, even after compounding for 20 years at 12% per year, his capital of S$1,000 would have become ‘only’ S$9,646.
But, what happens if you stretch the compounding period to 50 years? The investor’s S$1,000 investment would have become a six-figure portfolio – or S$289,000 to be exact. With inflation in Singapore clocking in between 2% and 3% historically, that six-figure sum would still allow for some substantial spending even after 50 years.”
3) Being patient with your investments can dramatically reduce your odds of losing money. For instance, let’s consider an investor who had hypothetically invested in the Straits Times Index (SGX: ^STI) at the start of every month between January 1988 and August 2012. Losses for a 1 year holding period occurred 41% of the time. Meanwhile, a 10-year holding period would have generated losses in only 19% of the time. Stretch the investing period to 20 years however, and there were no 20-year periods where losses occurred.
There is of course nothing wrong in wanting to invest with a very short time horizon. There would almost certainly be market participants who excel at the short-term trading game. But that said, investing for the long run is what can help increase the odds of success for most investors. Personally, I like the fact that this inactive strategy can not only fetch higher returns, but also relieves us from the stresses of trading frequently (your day job alone is stressful enough, I imagine!).
At the end of the day, it’s not necessarily the hare which wins the tortoise in a race.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.