How often do you trade your stocks? Do you turn over your portfolio an average of once a year, twice a year or 12 times a year? In this age of super-fast computers that are programmed to trade in nanoseconds, should you trade your stocks more often to keep up with the ever-changing stock market?
The Benefits of Trading Less
Mark Hulbert, founding editor of the Hulbert Financial Digest, has been tracking investment letters for a good many years. His Digest follows the investment performance of hundreds of investment advisory newsletters. The reports provide investors with a reliable source to determine which newsletters are offering good advice and which newsletters are not.
Hulbert and his staff compiled a huge database to determine how the frequency of portfolio transactions impacted performance results. He used more than three decades of history from hundreds of newsletters.
For each newsletter, Hulbert and his staff compared how a newsletter’s portfolio actually performed in each year against how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year.
Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during each year. Furthermore, in EVERY year the frozen portfolios performed better than their actual portfolio counterparts that included trading during the year.
In 2010, for example, the 500 model portfolios that Hulbert Financial Digest tracks gained an average of 14.6%. Not bad, compared to the Standard & Poor’s 500 Index gain of 12.8% in 2010. However, if the 500 model portfolios had been frozen at the beginning of 2010 with no transactions allowed, the resulting gain would have been 18.0%. Wow!
An additional study lends credence to Hulbert’s findings. Finance professors Terrance Odean of the University of California-Berkeley and Brad Barber of the University of California-Davis, studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.
Odean and Barber’s study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been better off had they done nothing.
How Often Should You Trade Your Stocks?
So the sixty-four thousand dollar question is: How often should you trade your stocks? There is no answer, because it all depends on the type of stocks. I am a conservative investor, so I tend to hold onto my stocks for about 18 months on average.
The data and studies seem to suggest that the longer you hold, the larger the profit. I advise using sell targets with the goal of achieving maximum gains within two years. Sounds idealistic, I’m sure, but if half of my stocks reach their targets, I will easily beat the market.
Holding stocks for longer periods of time has another benefit–receiving dividends! Dividends are the regular cash payments that a company sends to you or your brokerage account. You can, however, instruct the company or your broker to reinvest your dividends into additional shares or fractional shares.
Dividends are the payments of a company’s hard-earned profits. A company’s ability to continually pay a dividend provides concrete evidence that the company is performing well. And accounting malfeasance is harder, sometimes impossible, if a large transfer of cash is going to shareholders on a regular basis.
When looking for good companies that will provide above-average stock-price appreciation and increasing dividends, I look for several factors. These factors include strong balance sheets with low debt and lots of cash. I prefer companies that have paid dividends for decades where increases are common. And I check to see if the company is likely to continue to grow during the next several years.
*This post was originally published on November 3, 2016 and is periodically updated.
J. Royden Ward has spent his entire career seeking strong investment returns for his clients while keeping risk low. In 1969, he developed a computerized model of stock selection based on formulas created by investment legend—and Warren Buffett mentor—Benjamin Graham, and since 2003, he’s been spreading his wisdom far and wide as chief analyst of Cabot Benjamin Graham Value Investor.Learn More