Share Dealing - Why Long Term Holding May Not Be Appropriate

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.

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 inference 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 is not that you are holding for the long term but that you £1,000,000 invested.

Clearly £1 million is inconsequential to a commercial investment fund but is massive 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 a pot gets larger the absolute amount of money changes from being not enough, to enough and then to too much.

Real people investing the sort of money that they can afford for maybe only 20 years, starting at 45 when the kids have grown up and the mortgage payment is easily manageable simply need better returns than safe long term holding offers.

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. A few of us may have that million pound pot allowing us to live on dividends alone but most of us wont.

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.

Of course just because you need better growth doesn't mean that it has 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 can't which is why you need a different strategy.

A tempting strategy is to invest 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.

If you look at FTSE 100 companies many have periods of great growth and had you bought them than 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.

There is of course no index of the failed companies.

So looking at companies in the longer term I think that it fairly safe to say that it is highly likely 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.

Accepting this, 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
  • 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!

Long Term Holding Advice Changes When It Is Shown To Be Wrong!

As a private individual if you follow some advice that is supposed to cover 10 years and it turns out to be incorrect you don't really get much of a second chance, you still need to retire on the same date.

In the few years before it almost collapsed nearly everyone was saying the Royal Bank Of Scotland was an absolute essential to any long term balanced portfolio. If you were lucky you may have received dividends that offset a chunk of the capital loss.

In case you are thinking that the RBS shares will eventually recover, remember that the management gave up on this idea when they did a share swap, reducing the number of share in circulation to one tenth of the previous amount and increasing the price 10 fold. This moved the shares from about 25p to £2.50, meaning that an RBS share at the pre-collapse value would now cost about £60!

Yet every time a big business fails or there is a big change in a financial object everybody claims that it was an exceptional event and there is no need to re-evaluate a strategy.

Maybe you can put more than £5K away but even then the results of looking at Barclays Bank are quite startling.

Once you show someone these numbers they accuse you of picking a specific example to prove a point, despite it being patently obvious that this is not the case as both RBS and Lloyds show worse trends whereas HSBC looks much better.

Anybody who didn't have some bank shares in the 2000s would have been told that their portfolio was badly unbalanced and they really should get some.

Talking about this in the pub I am often told that I am ignoring the benefits of dividends and dividend reinvestment, "I have had 10 years of dividends from my holdings and have bought more shares in that company."

Sadly it often turns out that the current value of that holding is less than the initial investment plus the value of the reinvested dividends.

If all this downer on long term holding sounds wrong think of a number of big name companies and do a share price graph from the year 2000 to now. I suspect that you will be surprised by
  • The amount of your capital you would be losing if you had to sell today.

  • How much of your reinvested dividends were at share prices higher that they are now.

  • How many companies weren't public companies back then so they don't have a share price for 2000.

  • How many companies that you do remember you can't find.

For many people the period 2000 to 2019 would cover them starting to buy shares at 40 and at 59 gettting near to retiring.

Of course there are some spectacular gains to be had by holding onto shares for a long time, but you mustn't misread the past. I was looking at LON:AFC back in 2008 and I could have had close on 30 times what I didn't invest.

I didn't invest because I choose other similar companies, which didn't do as well.