How long should investors hold their stock investments?

How long should investors hold their stock investments?

OFTEN we hear some financial experts say we need to hold stocks long term, especially during the weak stock market situation like what we are experiencing currently.

Some gurus say the “buy and hold” strategy is the best investment strategy. However, some retail investors may argue that “buy and hold” is not suitable in Malaysia because if they pick the wrong stocks, some companies might even get delisted after a while.

The question of how long to hold has always been on the mind of investors when they purchase any stocks. Given the present weak economic and stock market conditions, some investors may lose patience as they do not know when the market will recover again.

In this article, we will look at the number of years that we need to hold our stock investments in Malaysia. We use the KL Composite Index average daily indices to compute the stock returns.

The following data was provided by Dynaquest Sdn Bhd. With its permission, we will provide the historical rolling annual compounded returns from 1970 to 2008.

The table shows the rolling historical annual compounded returns for holding the stocks for one, three, five, seven and 10 years.

It shows the average annual compounded returns and risks (measured by standard deviation) regardless of any starting or ending dates.

For example, the 25% returns in the second row and the second column of the table was the annual compounded returns of investing for one year from 1970 to 1971. The three-year returns of 56.7% was what you would’ve got if you started your investment in 1970 and ended in 1973.

If you started investing in 1970 and held it for five years (up to 1975), seven years (up to 1977) and 10 years (up to 1980), your annual compounded returns will be 16%, 14% and 21.8% respectively.

In terms of the overall average returns, except for one-year and three-year holding periods of 13.4% and 9.8% respectively, we notice that the annual compounded returns for five-year, seven-year and 10-year holding periods were almost the same, about 8% per annum.

However, the longer we hold our investment, the lower the risks that we face, which are measured by using standard deviations.

For example, if we hold our investment for one year, the standard deviation is 30.8%.

However, if we hold it a bit longer to three, five and seven years, the standard deviation will drop to 16.8%, 11.4% and 8.6% respectively.

For 10-year holding, the standard deviation is 6.6%. Based on two standard deviations, we are 95% confident that our returns will range from -5.1% (8.1% - 2 x 6.6%) to 21.3% (8.1% + 2 x 6.6%).

This is supported by the minimum returns of -2% and the maximum return of 23.6% for 10-year holding periods.

In conclusion, we need to hold stocks long term. We may not need to hold them up to 10 years.

However, we need to understand that we will face very high volatility on returns if we invest only for one year.

Besides, we need to make sure that we are buying good fundamental stocks in order to avoid poor quality stocks that are not suitable for long-term investment.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting
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