According to Morningstar, the average annual turnover within domestic stock funds is 104%. In other words, on average, domestic equity funds hold a stock for just 351 days before selling it.
Of course, such high turnover has a negative impact on returns in that it substantially increases costs. But even leaving that issue aside for a moment, doesn’t this level of turnover strike anyone else as a bit frightening?
I’m not a stock picker, and I never have been. Nor do I want to pay anyone to pick stocks for me. That said, if I was forced to choose between:
- A fund manager engaging in the Warren Buffett/Ben Graham “my-favorite-holding-period-is-forever”-type of investing, or
- A fund manager who holds stocks for less than one year before selling…
…I’d have very little hesitation about going with option #1.
I’m not here to say that it’s impossible to be a successful short-term trader. I am, however, concerned that many fund investors think they’re using a long-term buy & hold strategy, when in reality, all they’re doing is paying somebody to engage in short-term stock picking with their money.
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In the end, I imagine that many people aren’t thinking enough when they are using an investment strategy that requires much though, and thinking too much when they would benefit from a strategy that works best with no thought. Did that make sense?