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It can be tempting to buy and sell shares based on short-term market movements. However, history shows us that taking a patient approach to investing in UK shares can be a better way to building wealth over the long term.
Share investing can be a bumpy ride. As we saw most recently in 2020 with the pandemic, markets can sink rapidly, leading investors’ portfolios into a sea of red.
But staying the course and holding onto quality stocks can lead to superior returns over time. Fresh data from trading platform eToro perfectly illustrates the value of this strategy.
A timely release
According to eToro, “loyalty is just as crucial in investing as it is in romantic relationships.” And in a report perfectly timed for Valentine’s Day, it has the numbers to back up its view.
Studying data from Bloomberg and the Federal Reserve Bank of St. Louis, it concludes that the likelihood of making a positive return from FTSE 100 shares is:
- 66% over one year
- 73% over five years
- 85% over 10 years
- 83% over 20 years
The same trend can be seen with US shares, as the chance of generating profits with S&P 500 stocks stands at:
- 72% over one year
- 81% over five years
- 83% over 10 years
- 95% over 20 years
According to eToro’s global markets analyst Lale Akoner, “time in the market beats timing the market. There are ups and downs in investing just as in relationships, so it’s important not to always panic-sell at the first sight of a red flag“.
Thinking like Buffett
This is not to say that investors should always cling onto their shares if circumstances change. Indeed, eToro says that the likelihood of enjoying a positive return from STOXX 600 shares has declined over time, at:
- 66% over one year
- 66% over five years
- 61% over 10 years
- 47% over 20 years
But as in other aspects of life, investing throws up some anomalies from time to time. The weight of evidence shows that buying shares with the intent of holding them for a prolonged period — say five years or more — gives investors the best chance of making a solid return.
Billionaire investor Warren Buffett is a perfect example of how a patient approach can pay off. The lion’s share of his wealth has been made decades after he first began buying shares.
Staying the course
I take a long-term approach to my own portfolio. Let me give you the example of Legal & General (LSE: LGEN) — the share price plunged 14% within four months of my opening a position last April.
Instead of panic selling, I stayed the course, and the share has recovered significant ground. My holding is still down, but only 3%.
I’m confident that — despite intense competition — Legal & General shares will rise over the long term as interest rates are likely to decline, boosting sales and returns from its asset management arm.
I’m also confident its shares will rise as demographic changes drive demand for retirement and savings products. In the meantime, I expect the business to keep paying large dividends (its yield for 2025 is 9%).
Since 2005, Legal & General shares have provided an average annual return of 7.2% through price gains and dividend income. I’m convinced it will remain a solid long-term bet.
