Why not to BUY & HOLD stocks ?

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As rightly said by Arpit Arora, India’s leading Personal Finance Expert, “You should only hold something which you are confident will grow in long term but you cant fundamentally know this for any stock.” As we go along this blog, let’s understand why not to buy and hold stocks.

We are going to examine two sets of data backed up by different sources, different agencies, and different times to be able to interpret why not to buy and hold stocks.

 

1. Average Company Lifespan on S&P 500 Index (1960 Onwards)

This data explicates the Average Lifespan of the top 500 American companies. In the 1960s, on average, a company would last for as long as 60 years which came down drastically in a decade to 25 years. And from there on, gradually the average lifespan of an American company has settled down at 17-18 years which is further predicted to slow down based on the projections of the current data.

Based on this data if you were to make a financial decision looking at the last 10-year growth of a company you would typically have only 7-8 years to hold the stock before the company would cease to exist. This is too big a risk to take with your hard-earned money.

 

2. Average Holding Period of an Investor on the New York Stock Exchange

(Source: Weforum.org)

Now, this data represents the average holding period of shares on the New York Stock Exchange. As per the above graph, in the 1930s, Investors would hold the stock on an average for a year. This shot up to 8 years when the average lifespan of a company was 60 years. From the 1970s onwards, we see a major decline in the average holding period of shares on the NY Stock Exchange, and in recent times, the holding period is not even averaging up to 1 year. This can be attributed to losses made by people due to big companies collapsing and investors making hefty losses on assumed safe investments. Other factors which have made the scenario such is the age of instant gratification where people want to use the profits immediately and not capitalize on them.

When we collate both the data we studied above, we learn that both the lifespan of a company and the holding period of the shares are leading on the same path – a gradual decline. It is clear that too many leading listed companies getting delisted from the market have had a significant impact. Examples are Kodak, Sintex, Blackberry, Nokia, etc. which were once market leaders and no one ever thought they could be wiped out of the market, are worth nothing today. Coming to the Indian scenario, companies like Yes Bank, HMT, Vodafone, Reliance Power, Future Group, etc. were all once part of NIFTY 50 but they are either bankrupt today or are sitting at a very minimal market share. Therefore, betting on a brand name or the financial health of a company doesn’t guarantee that the company is going to stay in power forever.

Hence, the biggest saying of the stock market, “The stock market is only for long-term players”, is true, but it’s only partially. Isn’t it ironic what we examined in this article?

The biggest businesses can fail. Always consider “Why not to buy and hold shares” before you make your investing strategies. Investment strategies should be a mix of both long-term and short-term investing. To learn more about how to achieve financial freedom in less than 5 years, click here.

Watch Arpit Arora talking about “Why not to buy and hold shares” below: