When investing, remember who won the tortoise-vs.-hare race. Image:Jean Grandville, Wikimedia Commons.
When you study mutual funds, looking for appealing portfolio candidates, you would do well to consider their turnover ratios. A turnover rate reflects how rapidly a money manager is buying and selling holdings and how patient or impatient he or she is. It's the same with us individual investors: Turnover ratios provide insight into how long we're holding our holdings -- and recent trends aren't promising.
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A recent Jason Zweig column in The Wall Street Journal offered some eye-opening data: "[T]he annual turnover rate in U.S. stocks is running at 307% so far this year, up from 303% in 2014 ... down from the peak turnover rate of 481% in 2009." He notes that that reflects an average holding period of only 17 weeks.
Photo: Andreanna Moya, Flickr.
17 weeksIn case you don't realize it, 17 weeks is a fairly short period of time in the investing world. Yes, some people hold on to shares for only a few minutes or hours. They're day traders, who tend to lose most of their money. Seventeen weeks is not even half a year. It's not even two quarters of a fiscal year. If you're buying into a company because you believe its future is bright and that its stock should appreciate over time and reward you handsomely, then you're really not giving it a chance to shine.
Short-term investing is problematic in many other ways. For example:
- Taxes: The IRS distinguishes between long-term and short-term investment this way: Anything held for a year or less is short-term, and anything held for more than a year is long-term. Long-term capital gains generally get a lower tax rate, currently 15% for most folks most of the time, and close to 25% for the highest earners among us. Short-term gains, though, are taxed at your ordinary income rate, which is 25% or 28% for most folks and about 40% for the highest earners. Those with mostly short-term gains are therefore paying a lot more in taxes than longer-term investors.
- Commission costs: If you're paying $10 every time you buy or sell some stock and you do so twice a week, on average, you're spending more than $1,000 each year just on commission costs. Yikes.
- Timing: Then there's timing. Many short-term investors are guessing when it's the best time to jump in or out of various stocks. That's silly, because no one can really know exactly what the stock market or any particular stock is going to do in the very short term. Over the long run, though, great companies will keep growing, as will their stocks.
Why set the bar low for yourself with short-term trading? You can make much more money if you're patient. Photo:Ron Armstrong, Wikimedia Commons.
- Low goals: Short-term investors often have low goals, which they often don't even achieve. If you're jumping in and out of a stock aiming to get a 10% gain, you might be missing out on the opportunity to double or triple your money, and along the way average much more than a 10% annual gain.
- Poorer performance: Plenty of studies have shown that frequent trading hurts performance -- even among mutual fund investors. You'll often make more money over the long run by buying great stocks and then doing nothing rather than by trading frequently.
17 yearsDon't just take my word for it, though. Here are some familiar names and how they performed over the past 17 years, not weeks:
Of course, not every company will outperform, but if you choose well and are patient, you'll probably do well.
A terrific option for many, if not most, of us is to simply opt for a simple, low-cost broad-market index fund, such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, and Vanguard Total World Stock ETF. Respectively, they will distribute your assets across 80% of the U.S. market, the entire U.S. market, or just about all of the world's stock market. And over the very long term, the U.S. market has averaged close to a 10% annual return.
In short, if you're an impatient investor, holding your stocks, on average, for weeks and not years, then I urge rethink that approach. Think of Warren Buffett, arguably the world's greatest investor, who has said that his favorite holding periods is forever.
The article The Latest Turnover Rate Shows Americans Twitchy About Stocks: How Does Your Investing Compare? originally appeared on Fool.com.
Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,owns shares of 3M, Costco Wholesale, and Starbucks. The Motley Fool recommends 3M, Aflac, Costco Wholesale, CVS Health, Home Depot, Nike, Sherwin-Williams, and Starbucks. The Motley Fool owns shares of Costco Wholesale, Nike, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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