(Note: You may want to read last week’s blog dated April 7, 2014, before you read today’s entry.)
First of all, the fact that major brokerage houses can trade faster than individual investors hurts day traders looking to make a quick buck in the market much more than buy-and-hold investors. Any would-be day trader needs to know that trading at a speed disadvantage is just another factor that makes it next to impossible for them to beat the traders Tom Wolfe described as “Masters of the Universe” in his novel Bonfire of the Vanities.
However, remember, if you’re invested for the long-term — years and decades, not minutes or months — it simply doesn’t matter if stocks you own inside of a mutual fund or ETF, or directly, change hands every few minutes. Or even every few seconds. Losing out on the fractions of a cent trading pros can make in rapid-fire trading simply does not compare with the value you can build up over a long-term investment horizon.
To paraphrase Mark Twain, the death of buy-and -hold investing was greatly exaggerated during the most recent market downturn. In fact, the buy-and-hold approach is not only alive and well, but the anecdote to Wall Street’s unfair trading advantage. Simply, if you own a properly diversified and allocated portfolio and measure your returns over three-to-ten year time horizons, the minuscule value Wall Street’s elite traders create in milliseconds doesn’t matter.
Also consider this: New research from David Blanchett of Morningstar, Michael Finke of Texas Tech University and Wade Pfau of American College suggests that stocks become less risky the longer you hold them. (Notably, the researchers specify that they do not advocate holding specific individual stocks for the long-term, but indexes or baskets of stocks.)
They conclude that investors can benefit from “time diversification,” whereby they practice buy-and-hold investing in a sizable portion of their portfolio and reserve a much smaller piece for short-term trading. They also point out that the benefits of holding equities for the long-term have been increasing over the last 110 years.