This is how long the average investor holds onto their shares

It seems we are now all more impatient than in times gone by, wanting to make a quick buck.

| More on:
A little girl holds on to her piggy bank, giving it a really big hug.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

"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.

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.

More on Investing Strategies

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Dividend Investing

Analysts name the best ASX dividend stocks to buy this month

Let's see what they are saying about these income options.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

2 cheap ASX 200 shares that look too good to ignore today

Cheap shares are hard, but not impossible, to find right now.

Read more »

Woman happy and relaxed on a sofa at a shop.
Growth Shares

Are these 2 top ASX growth shares buys?

Are these high-flyers still buys?

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for 5% to 7% yields

Brokers think these shares could be top picks for passive income investors.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Dividend Investing

Own ASX A200, NDQ, or ARMR ETFs? It's dividend payday for you!

Betashares will pay distributions to ASX ETF investors today.

Read more »

A young female ASX investor sits at her desk with her fists raised in excitement as she reads about rising ASX share prices on her laptop.
Dividend Investing

Why it's a great day for Vanguard ASX ETF investors!

It's dividend payday for investors in the VAS, VHY, VGS and other Vanguard ETFs today.

Read more »

A woman presenting company news to investors looks back at the camera and smiles.
Blue Chip Shares

3 ASX 200 blue chip shares to buy with $3,000 in July

Analysts have recently named these well-known stocks as top buys.

Read more »

A cool dude looks back at the camera while ziplining above the treetops.
Cheap Shares

2 great ASX shares to buy in July: experts

These companies have a lot going for them. Here’s why.

Read more »