As the pace of life in the 21st century continues to increase, and technology has enabled access to vast amounts of information, investing has changed. Human emotions, though, remain rooted in our hunter-gatherer past.
24-hour news feeds and relentless advertising have created an environment where people are more anxious about their financial security and become prone to quick fix solutions. Trading platforms have mushroomed and target the human fear of missing out by highlighting the enormous riches to be had from day trading or crypto.
An example is Robinhood which has quickly become one of the most popular brokerages in the US thanks largely to its easy-to-use trading app that makes share trading appear very simple and game-like for users. The app's mobile-first, intuitive interface offers instant feedback, akin to gamification mechanics. Personalized challenges and goals within the app enhance user engagement and satisfaction.
The problem with this approach of ‘gamified investing’ coupled with our modern desire for instant gratification and quick fix solutions, is that the end result is more akin to gambling than traditional investing for the long term.
There are many studies which corroborate the painful truth that the average investor trades too often and at the wrong times. DALBAR, as US based independent investment research company, calculates that the average investor loses 3-4% annually due to selecting expensive products, switching funds, and trying to time the market.
“The stock market is a device for transferring money from the impatient to the patient” WARREN BUFFET
The chart below shows the average holding time of shares in the USA rising from 1 year in the frenzy just before the 1929 Stock Market Crash, to over 7 years in 1960 and back down to 10 months today.
Warren Buffett has become a legendary investor in part because he ignores market noise and is relentlessly focused on a long time horizon. He once said that “our favorite holding period is forever”.
Investing for the long term is also a core characteristic of successful businesses. Many of the largest companies in the world today are older than you may think. Tech giants Apple and Microsoft are nearly 50 years old while IBM is over 100, the oil majors Exxonmobil, Royal Dutch Shell and BP are all more than 100 years old, while mega-banks JP Morgan, Barclays and Citigroup are over 200 years old.
Both the South African and US stock markets have delivered real total returns of 7% pa since 1900. (This is the return above the inflation rate) A 7% real return would nearly double an investment and its purchasing power, every 10 years.
The first unit trusts were launched in South Africa in 1965. This was a game-changer for investors because instead of having to buy individual shares from stockbrokers, they could now leave these decisions to large teams of investment professionals who have the experience and resources to properly analyse the fundamentals of each share and bond. Over time the number of unit trusts proliferated, so that there are more than 2 500 registered unit trusts in SA today, each with their own specialized focus and views on the markets.
“Our favorite holding period is forever” WARREN BUFFET
Investors saving for their retirement in products such as Retirement Annuities, often fall prey to the attractions of looking to the short term. Switching between funds “because Fund A has performed better than Fund B over the last 12 months” is the most common investor mistake worldwide.
Trading almost never works, while long term investing does. Set up your portfolio well and leave it for the long term. Avoid excess trading – the costs and the time out of the market soon erode precious gains.
Model portfolios, such as our Rutherford Balanced portfolio, have become increasingly valuable because we select a combination of market leading unit trusts that is a best fit for your investing profile. This allows our investors to take a long-term view in the knowledge that their portfolio is structured to meet the opportunities and challenges in the years ahead.