“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes” says Warren Buffett, the most successful investor in the world. The relevance of this saying cannot be disputed as our analysis show why investors should take long term positions.
The high volatility of the Nigerian equity market has made investors in this asset class susceptible to loss in investment values, hence the need to be strategic when making investment decisions ranging from security selection and investment horizon decisions.
Since no one is certain about the future and could only make forecast based on historical trends, analysis have shown that investors begin to enjoy value/returns for their investments when held for a longer term.
However, this is largely dependent on the right choice of stock selection amongst the pool of stock options in the market.
Result obtained from the analysis shows that historically, on the average returns on investments are positive when stocks are held for a period of 4 years as lower durations hold higher risk of value loss in the Nigerian market.
Taking our sample from the NSE30 index which comprises of 30 most capitalised companies listed on the exchange, running through these stock performances over a period of five years.
The study adopted 2014 has the base year, on the assumption the year being the entry point for investors and putting into consideration different investment horizons of players and ultimately performances during the stated periods.
On the average, investors who decided to hold investments within a period of 1 year amongst securities listed in the stated index saw returns dip by 18 percent.
This we may want to blame on declining oil prices during the period which saw foreign investors take flight on declining GDP growth, downward pressure on Naira which eroded value of their investments in Nigeria, shaky companies’ fundamentals etc. to mention but a few.
Meanwhile, those who held positions for 2 years had value for their investments plunge 30 percent, while investors who held 3 years by 31 percent respectively.
Poor performance of companies stocks could be tagged to a recessed economy during the period 2016 to Q2 2017.
Meanwhile, stocks began picking up in the fourth year as most companies on the NSE30 index began returning value for investments. On the average, companies on the index returned by 24 percent value to investors on the exchange.
Likes of Stanbic Ibtc (137%), International Breweries (125%), Dangote Flour (82%), Presco (80%) and Guaranty Trust Bank (75%) topped the chart of the best performers in a 4-year space.
However, result of our analysis shows that investors who anticipated further growth trend, thereby extending the investments into the fifth year saw value drop marginally by 4 percent.
This trend portrays the higher possibility of a reversal in gains once investors’ horizon exceeds four years.
This although is a peculiar case in the Nigerian scenario, hence not applicable to other markets as studies have not been conducted in other equity markets of the world.
Theoretically, it has been established that the longer you invest, the more likely you will be able to weather low market periods. Assets with higher short-term volatility risk such as stocks tend to have higher returns over the long term than less volatile assets such as money markets. It is very difficult and risky to time the market.
As stated earlier, the choice of stocks is likewise important in determining returns on your investments.
Highlighting but a few of the benefits of holding long is that long term investments are associated with lower volatility rate.
Another benefit that a long-term investor can enjoy is tax advantages on capital gains. Gains achieved by investing for short term are taxed as regular income whereas gains achieved by investing for long term (at least for more than a year) are taxed at rates lower than your income tax bracket.
More importantly, holding investments in the equity market for a long time enables you to overtime correct your investment mistakes. Riding your winners over the long run tends to fix a large number of, if not all, “investing mistakes.”
