Why ‘Buying and Holding’ Shares for the Long Term is Not a Good Strategy
Pick up any investment magazine and you will undoubtedly find an article sprouting the importance of investing for the long-term to achieve financial independence. And while this is true, you will often find that the article favours one particular investment over another depending on the writer’s bias. Indeed, the perennial debate comparing the returns on shares with the returns on property continues year in, year out depending on market conditions. If the writer has interests in the share market then the article will usually favour shares; but if the writer is a property investor then property comes out in front. So which is the better investment vehicle? And why do we get conflicting answers in this debate? I will address these issues in this article, as well as discuss why a long-term ‘buy and hold’ strategy in the share market is financial suicide.
Before we get started, let me clarify what I mean by long-term. Generally, the perception is that to yield an adequate return on any investment you need to hold the asset for 10 years or more. And while I would argue this is the case in the property market, the same cannot be said for the share market, which I will demonstrate to you throughout this article.
As a share trader I could write this article in favour of shares, however, I am also a property investor and believe that any intelligent investor needs to be in both markets. The truth of the matter is that it is very hard to compare these two markets, simply because we are not comparing apples with apples. There are many different variables to consider when investing in either of these markets; for example, leveraging, taxation, interest rates and holding costs to name a few. Then we need to consider what aspects of these markets we compare to provide a fair and unbiased analysis. Do we compare the All Ordinaries Index with the Melbourne property market, the Victorian property market or the Australian property market? Do we compare raw capital growth or capital growth and income? The combinations are endless and as evidenced in other articles, it is possible to deliver any outcome depending on your bias and make it look like we have settled the dispute once and for all.
If we examine the share market over the 10 years from July 1992 to July 2002, the All Ordinaries managed 92% growth rising from 1643.60 to 3163.20, which sounds impressive; however, this is slightly less than 7% per annum. In any good investment property you would have doubled your money within 7 to 10 years, which is better than the 7% return had we invested only in shares. If we examine the 20 years from July 1982 to July 2002 the All Ordinaries rose 671%, which is better than 7% per annum, but only because of the bull run (a period of market optimism and rising values) of the late 1980’s.
If we analysed the returns on the results above using capital growth over a 20-year period then shares outperformed property, although not by much. However, if we only look at the last 10 years then property has outperformed the share market and it is generally the comparison of this one variable that spurs on the perennial debate between the two investment mediums. In my opinion both investments vehicles are essential for accumulating wealth as each assists you to invest in the other, given that shares provide the cash flow to invest in property and property provides leveraging opportunities to invest in shares.
As I mentioned, property is a long-term buy and hold investment strategy where ‘time in the market’ yields good results. When buying a property today it will remain relatively unchanged as an investment for decades with the exception of general maintenance requirements. Shares, on the other hand, should never be treated as a long-term investment, rather they are a short to medium-term investment vehicle where ‘timing’ the market is far more important than ‘time in’ the market. In fact, timing the market is everything simply because it is about buying low and selling high, which is where the savvy investor has a huge advantage. This is because shares are organic and consistently changing as a result of stock splits, takeovers, delisting and many other market actions that take place. A share bought today will generally not be the same share in the next decade.
Buying a good performing property portfolio for the long-term is a simplistic approach and will yield high returns if you buy in good capital growth areas. For example, Melbourne property has risen on average at a rate of 8% per annum since recorded history. Buying and selling property over the short-term, however, generally yields very little results due to the high transaction costs and long periods of low growth. Indeed, it is a well known fact that property generally has strong growth for two to three years within a ten year period, and then only increases marginally better than inflation during the other seven years.
The reason why most of us hear the words ‘buy and hold’ or ‘it is time in the share market that yields returns’ is because the financial industry cannot time the market. Many of you would have heard the industry catchcry that you need to hold a portfolio for 10 years or more to yield an adequate return. In reality, this results in the investor experiencing a rising market for 30% to 50% of the time, to compensate for the years that the market is moving down or sideways. If you don’t believe me, just look at the returns on managed funds over the past 10 years. At least 80% have underperformed simply because funds are too large to manoeuvre with any speed. Therefore, to accept that time in the market is more important than timing the market is probably the greatest down fall of anyone wanting to beat the market average.
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