Long Term Holding Overview

The traditional view is that shares should be bought and held for a number of years, this is so well known that the internet should be full of articles and case studies proving this.

The Evidence For Long Term Holding

Surprisingly if you try and find the research that led to this conclusion you will come up empty handed.

I suspect that the reason for this is that people are looking at what works well for institutional investors and have assumed that it also applies to retail investors.

But I don't see why anyone would assume that what works well for institutional investors with a continual stream of new money and hundreds of millions to invest for returns over the next 50 years will also work well for a private investor with limited new funds and a small pot that probably has a life of around 10-25 years?

Where Long Term Holding Works Well

If you have a million pounds to invest and put it into a tracker of a major index such as the FTSE 100 or S&P 500 and just leave it there for the rest of your life then the results will be probably be very good.

This will be because the dividends and share price growth will probably exceed inflation and your needs.

So every year you don't quite spend all the dividends and the good shares rise more that the bad ones fall so your portfolio grows faster than inflation.

The lesson that most people take from this is that as long term holding is good in this case it must also be good for me.

The critical point of the success in this example though is not that you are holding for the long term but that you have £1,000,000 invested.

Clearly £1 million is inconsequential to a commercial investment fund but is massive amount to most private investors.

Where Long Term Holding May Not Work So Well

If your investment is maybe £5,000 per year then the safe long term tracker type approach gives you absolute returns that may be too small to be useful. 5% of £5K is £250 whereas 5% of £1m is £50K;

I want to stress this point, for a given percentage return as an investment gets larger the absolute amount of money returned changes From being;
  • Not enough
  • To enough
  • To too much
Most people investing the sort of money that can make useful profits only do so for maybe 25 years, starting at 40 when the kids have grown up and the mortgage payment is easily manageable.

For these people making their own investment decisions to get returns 1%-2% above inflation is simply pointless especially considering the risks.
  1. If the share price rises over the period that you hold the shares and you receive dividends then you can easily beat inflation and get a good return.

  2. if the share price rise is less than inflation then any dividends will help to offset this loss.

  3. If the share price falls then any dividends will have to offset both inflation and the capital loss, which they almost certainly won't.

Option 2 and 3 happens more often than many people want to believe, which of course offsets any gains made by option 1.

If you are going to invest a small amount you may want to consider either the shelter offered by being part of a larger more diverse fund or a strategy than has higher returns.

An Individual Investor Usually Can't Do Better Than A Professional Doing The SAME Thing.

Of course just because you need better return doesn't mean that they have to be available.

If it is possible to do safe long term holding that achieves these greater returns then why do most/nearly all managed funds run by experts perform worse than trackers and why should you do better than the professionals?

The answer is you almost certainly won't which is why you need a different strategy.

A tempting strategy is to invest long term in only some FTSE 100/250 companies so that your investment is safe and you will get greater growth as you are not investing in the failing companies.

The problem with this is finding these companies and I don't believe that a private investor can do this, There is more explanation on why this is the case in the short term holding strategy.

If you look at FTSE 100 companies many have had periods of great growth and had you bought them then, all would be good. Of course the simple fact that the company is in the FTSE 100 means that you are looking at a successful company.

It is also the case that had you bought these companies at the much lower prices you would have been buying companies that were only in the FTSE 350 or possibly The AIM, in other words higher risk investments.

It is also very convenient that there is no index of the failed companies and it is very difficult to find a list of share issues that diluted shares holders' ownership.

The Lifespan Of A Company

Something that is implicit in long term holding is that the company that you have bought shares in will exist in some form for the long term.

I think that it fairly safe to say that many companies that exist today, will not exist in 25 years' time in the same form.

A very small number will stay owned with an ownership structure that remains fundamentally unchanged, but these may not be publically traded companies.

Some will merge fairly and the shareholders will have a valuable holding in the new company.

The rest will either go out of business completely leaving shareholders with nothing or will slowly lose value and merge on unfavourable terms.

Within this range of options you will also find a surprising number that do share issues, forcing you to either buy more shares or accept a reduced ownership.

By reduced I don't mean 10% less, i mean ending up with one tenth or less of your original percentage, when companies are reduced to share issues their share price has usually collapsed and the new shares need to be issued at a discount to thier current price.

Accepting this it follows that the longer you hold shares in a company the more likely you are to be holding them when things go wrong.

As an example take Yellow Pages (Yell/Hibu), prior to the internet they were a sure fire winner, Thomson Directories had tried to compete and failed so what could ever replace them?

What about
  • Thomas Cook, Debenhams, House Of Fraser, HMV, Woolworths, Littlewoods, BHS, Rumbelows or Comet, for people over 40 its pretty hard to imagine a high street without them? Sure the name still remains in some cases but their shareholders were wiped out at some stage.

  • The giants of aviation such as De Havilland the inventor of the passenger jet, the Comet?

  • Any of the British car makers?

  • Construction and outsourcing giants such as Carillion or Interserve?

  • Computer companies such as DEC and ICL in the Mini/MainFrame market and pretty much every PC maker?

Even Provident the 100 year old doorstep lender seems to be losing money selling subprime loans at high interest rates!

Investment Funds Can Sit Out Dips In The Market But An Individual Can't

As a normal individual it is likely that when you get to the retirement age you will be funding your retirement with a combination of dividend income and capital drawdown, selling some shares.

Very few of us will have that million pound pot allowing us to live on dividends alone.

Capital drawdown is a terrifying thought imagine having to sell shares in the 2008/2009 slump, each year's income easily equates to 5-10 years in better times.

The 2020 COVID slump was much less dramatic with fewer companies being affected but again it would have been a bad time to sell and many companies were suspending dividend payment.

If you were reliant on dividend payments then you may have been forced to sell shares at a deflated price.

Although less obvious to the casual observer in many ways 2020 was worse than 2008/2009.

In 2008/2009 it was a big share price drop but mostly business as usual.

In 2020 many companies took on very large loans or did large share issues often wiping 50% or more off the value of existing shareholdings.

A long term investment fund with new money coming in can sit this out as it can service its obligations from companies less affected by the current crisis and is able to buy at the deflated prices.

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