Buy and hold for the long term is a classic and proven strategy for wealth creation from equity markets. And I am not the only one to say this. Ask any successful investor, and they will vouch for it. Yet, we often come across investors who do just the opposite, i.e. buy and sell stocks frequently. But sincerely speaking, how many people do we know who actually made any money with excessive churning of their stock portfolio?
Research analysts who analyze companies release quarterly and annual financial projections for companies from time to time. Investors use these projections to indulge in frequent buying and selling with the motto of being the first ones to benefit from any expected movement in share prices. However, in this process, these investors often forget two critical things.
Lose Out On Power Of Compounding
Compounding is one of the best ways to multiply wealth. When we invest for the long term in good quality stocks, the power of compounding works in our favour, whereas frequent buying and selling mean losing out on the same.
According to Albert Einstein, considered as one the world’s greatest genius “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t… pays it.”
And if I calculate the scope of the amount of wealth you generate by investing in fundamentally robust recommendations, the same would result in something huge.
Here is what you may earn if you are invested for 5 years:
The calculations in the above table are just for illustration purposes only and not to be taken otherwise.
The real power of compounding can still not be seen in the table above.
If you would continue to stay invested for the next 5 years as well, here is what you would get 10 years from now:
The calculations in the above table are just for illustration purposes only and not to be taken otherwise.
If you check the above two tables, they clearly showcase the power compounding would have. Even at a CAGR of 25% annually, you have a potential to grow your wealth 3x every 5 years.That’s the power of compounding.
Buying And Selling Frequently Means Higher Brokerage Charges And Taxes
Most investors who buy and sell frequently look only at the profits or losses they make on their transactions. Surprisingly, they underestimate the fact of how brokerage and other charges such as stamp duty charges, SEBI turnover tax, GST and STT are eating into their profits or adding up to their losses. And, not to mention higher capital gains payable on profits made.
Just as they say “Little drops of water make the mighty ocean”, these small but recurring charges add up to a considerable amount over time.
On the other hand, long term investment requires lesser brokerage charges and taxes as you hold your investment for a long time. Those who buy and sell frequently may find long term investing boring, but then the rewards of it outclass its shortcomings by a vast margin.
In fact, Warren Buffett, one of the most successful stock market investor, has said time and again that his preferred time to hold a stock is, “forever.” This can be summed up in his quote, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Honestly, excessive churning makes no sense. Strictly stay from this disease as it can never create wealth. Remember the only one who gains from it, is your broker.
Read more: How Long-term investing helps create life-changing wealth – TOI.