With markets jumping around a lot lately, some traders have been moving in and out more often than normal. As a private investor, not a short-term trader, I prefer a buy and hold investing style. Here are two reasons I like it.
Lower transaction costs
A lot of new investors do not realise how hurtful transaction costs can be to their returns. A couple of percentage points here and there does not sound like much. But it soon adds up, especially as often percentage trading fees also have a minimum amount.
It is not just trading fees, commissions, and stamp duty that can eat into profits, either. There is also usually a difference between the buying and selling price of a share. This is similar to the ‘spread’ one sees when buying a foreign currency, where there is a gap between the buying and selling rate. The spread on share prices can be miniscule for large companies, but it can make quite a difference when investing in smaller ones.
Take Income & Growth Venture Capital Trust as an example. As I write, I can buy shares in the £116m company for 92p each. But if I sell them at the current price, I would only receive 89p per share. In other words, if I bought the shares, I would need them to increase by 3.4% just to be able to sell them at the price I paid for them! On top of that, I would likely need to pay trading fees and other costs — twice. If I buy shares to hold, I would still need to pay such costs when I buy them. But my buy and hold investing style can give the shares a longer time frame in which they can, I hope, increase in value more than I need to pay for charges. That is one reason I like this approach to investing.
Buy and hold investing
If a share I buy really does have a strongly performing business that helps boost its share price, holding it longer should improve the size of my total return – sometimes dramatically.
As an example, imagine I invest £500 in a company and its shares go on to increase by 9% a year. Although that might not sound much, managing a 9% share price increase year after year is quite a feat. Each year the baseline is getting bigger.
The power of compounding
After one year, my shares would be worth roughly £547. But if I wait for five years, they would be worth around £783. After 10 years, the value would be around £1,226. That already sounds very attractive to me — but after 30 years, my shareholding would have soared in value to £7,365. That is the second reason I like buy and hold investing: the power of compounding.
What is the point of selling up after one year with my £47 gain (before commissions and fees), to try and find another share growing at 9% when I could just keep my money in the one that is already growing 9%? Past performance is not necessarily a guide to what will happen in future. But if I have identified a business I think has the potential to make high profits for decades into the future, financially the rewards will hopefully pile up more if I am willing to hold the shares for the long term.
