As technology has advanced, consumers have got used to having everything on demand. We track our fitness daily. We can track the movement of a stock every few seconds. We can download an app and change our portfolio within minutes. If we need to know information on a fund’s performance, it is readily available. Annual reports are instantly available online for all past years. There’s a relentless focus on quarterly earnings. From news to next day deliveries, our lives have become more instant.
Have such advancements in technology started to change the way we think about investing, and consequently affect the way we invest?
I once read a report that said that the average holding period of a share on the NYSE was around seven years in 1940, and dipped to just under three months, by 2015.
While the length of time that investors hold shares has been shrinking for decades, the trend was accelerated in the volatile markets of 2020, reported Reuters. The calculations based on New York Stock Exchange data show the average holding period for U.S. shares was 5-1/2 months in June 2020, versus 8-1/2 months at end-2019. In 1999, 14 months was the average.
Financial journalist Grace Oliver reports on the views of two asset managers.
Ryan Hughes, Head of Investment Research, AJ Bell
I’m a believer that this constant bombardment of information has an impact on our brain’s ability to think clearly about the long term. This becomes very relevant when looking at investments. For an industry that bangs on about the important of long-term investing, there is an unhealthy focus on short-term performance, whether it is good or bad, from all aspects of the industry from asset managers, the media, advisers and investors.
When talking to fund managers, many say they have a long-term mindset and then in the next breath tell me their average holding period is between one and three years. If I think back to when I started interviewing fund managers over 20 years ago, there has been a distinct shortening of the typical time period fund managers talk about when three to five years was much more common and access to information must be a key contributor to that fact.
Also, the constant push by AMCs to have a marketing story risks creating a poor culture that encourages short-term risk taking which, while potentially helpful in delivering a short term sales boost, is in all likelihood going to lead to poor investor outcomes when market sentiment shift.
Darius McDermott, Fund Manager, Fund Calibre
In most other aspects of life, we can see results quickly – going to the gym and getting fit, for example, you start seeing results in a few weeks. And this is filtering through to investments.
We now have apps where you can trade instantly and you are encouraged to do so repeatedly. Last year, some Robinhood users were trading 5,000 a month. To put that into context, Mick Dillon who is co-manager of Brown Advisory Global Leaders says he trades about once a fortnight.
These traders care if a stock is going up or down between breakfast and lunch. Most people should really ignore that and think about where a company will be in five years’ time. Life is too busy already to be constantly monitoring a phone for stock movements. But it’s hard not to be influenced by the daily noise – even if really it is irrelevant to your own investment goals.
More information does not necessarily help make better decisions, unless you have the ability to process that information effectively. Even then, identifying what is relevant information rather than just noise becomes critical.
It’s hard to get an edge on the analytical side of investing today – you have to get an edge by thinking more long-term and about investor behaviour.
Be aware
Our instinctive preference for instant gratification has become a baked-in feature of investors.
We have been overrun by a short-term perspective of the stock market. The get-rich-quick mentality is a false pursuit. There are no shortcuts in the stock market and not shortcuts to wealth creation.
Short termism is at odds with building long-term portfolio wealth. Remember that when you want to bet on a “hot tip” or instinctively want to sell your stocks and reinvest in something “more lucrative”.