Money Matters: Long-term investment in today's markets

By Z. Andrew Yarumian

Long-term investing in stocks seems to be on the decline.

What is “long-term” when it comes to stocks?

The answer to that question varies, but a common definition would be a holding period of at least five years.

Given the volatility and dynamism in today’s markets, five years seems like an eternity. It is important, however, for investors to separate fundamental changes in the economy and stock markets from the noise of short-term events, information and data. In the current age of the Internet and almost instantaneous access to new information, it is very easy to get caught up in the noise of the stock market with knee-jerk reactions leading to the purchase and sale of stocks.

Perhaps the most successful and celebrated long-term investor is Warren Buffett. His long-term approach to investing has proven to work over decades, and provides some confidence that this style of investing will continue to be successful in the future.

On the other hand, short-term trading by timing the stock market generally has proven futile. There may be periods of time when an investor may be successful when it comes to short-term trading, but what eventually happens is that a few major market movements are missed, and all the previous excess returns are more than offset.

Long-term investing success requires an investor to have good analytical skills, discipline and patience. The idea of patience at a time when instant gratification seems to be the norm is quite important.

Many organizations and individuals espouse long-term views, but fail in the actual execution. Several years ago I had lunch with the director of pension investments of a multi-billion dollar fund for a well-known Fortune 100 company. He complained that his board of directors preached to the stockholders that their Blue Chip company should be viewed as an outstanding long-term investment. At the same time, those same board members complained to him about the short-term quarterly investment results of the pension fund. So it is simple to say that an organization or an individual is a long-term investor, but difficult to actually execute — especially in troubled times.

The longer the holding period for stocks, the lower the chance is of experiencing a negative return. Using the S&P 500 as an example, since 1926 there has never been a negative return for a 20-year holding period for stocks. Negative returns for 10-year holding periods are very rare, but did occur for the 10-ear period ending in 2009. Even very long-term investing does not guarantee success, but it should improve one’s chances of being a successful investor.

Most likely it behooves most individual investors and institutions to seek out investment managers who have the capability to continually monitor stocks on a day-to-day basis, while at the same time employ a disciplined and proven investment approach over the long term. Investors often simply review an investment manager’s record over the most recent three-, five- and 10-year periods, which is a good start. I believe, however, that using rolling five-year periods over the last 10 years provides more insight into the consistency of the investment managers’ record through different investment environments and time periods.

Very few money managers are able to consistently provide top quartile returns relative to their peers over rolling five-year periods. If you find an investment manager with that type of superior record, it is likely a good indication that he or she will continue to sustain a superior record through the long term in the future, and increase your chance of investment success.

Z. Andrew Yarumian, is managing director, institutional relationships, for Karpus Investment Management. He can be reached at (585) 586-4680.