Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

INVESTING isn’t usually considered a romantic business. Yet the notion of buying shares in a company and holding them over the course of a lifetime may offer a momentary tug at the heart strings.

Investing in a ‘forever stock’ - one you buy and hold forever(ish) - is an investment strategy which has some high-profile admirers. Warren Buffett, perhaps the world’s most famous investor, once said his “favourite stock holding period is forever”.

The idea is you buy a great company, hold it, and give it the time it needs to grow. The strategy relies on companies compounding their growth over time to produce substantial returns in the long run. If you’d have invested £1,000 in Amazon when it went public in 1997, for example, you’d have enjoyed a return well in excess of £2 million now. It’s the ultimate in long-term investing. Please remember past performance is not a reliable indicator of future returns.

There are other advantages to the strategy. Most of us don’t have the time or inclination to constantly monitor our portfolios. Picking a stock with the intention of holding it forever is a sure way to keep your investing hassle-free.

Not everyone’s convinced. Some would argue that this approach relies more on luck than skill. Investing in Amazon in 1997 sounds great, but back then the company was nothing more than an online bookstore. No one could have foreseen what it would become.

Are they right? Is the idea of a forever stock too good to be true?

I spoke to a few experienced fund managers to get their view.

What is a ‘forever stock’?

Between the four managers I spoke to, there was one thing they all agreed on: ‘forever’ is too long.

Fund managers like to feel in control of their surroundings. Given they don’t know what the world is going to look like over a span of decades, there’s little chance they can determine a stock’s value that far into the future.

Markets are often dominated by prevailing trends, and those can be hard to foresee. Right now, it’s the US tech giants leading the pack. A decade ago, it was the oil majors. Now, as we head into a more sustainably-minded future, the longevity of energy giants like BP and Exxon (once the biggest company in the world) look in doubt.

As Aruna Karunathilake, manager of the Fidelity UK Select Fund, tells me: “The forces of creative destruction usually impact all companies in the very, very long term. If you look at the composition of the Dow Jones or FTSE 100 a hundred years ago, there will be very few survivors now.”

It became apparent early in my conversations with professional investors, that the idea of ‘forever’ should instead represent the lowlier ambition of something well above an average holding period. We settled around the 20-year mark to hold a stock ‘forever’, and that’s where things got interesting.

Are forever stocks a good idea?

‘Nonsense’ - that’s the verdict of Leigh Himsworth, manager of the Fidelity UK Opportunities Fund.

To his mind, this approach means “investing in faith rather than actual fact”.

Julian Fosh, manager of the Liontrust UK Growth Fund, is more tolerable of the idea. A key tenet to his investment style is “finding businesses that boast barriers to competition”. Julian is happy to hold onto a stock for however long those barriers remain durable.

He says: “The key for us in deciding whether a company can be considered a long-term holding or a ‘forever stock’ is the extent to which it can maintain barriers to entry, sustain profitability and compound that growth to deliver great long-term returns.”

The problem is that it’s very hard for companies to do these things ‘forever’, and even harder for investors to identify the select few which will. As Jeremy Podger, manager of the Fidelity Global Special Situations Fund, puts it, “companies that constantly reinvent, split up and grow again are rare indeed.”

It’s tempting to assume the stocks with the best chance of doing so are today’s outperformers. However, their continued success is far from a given. Track the performance of the top stocks from 20 years ago and their positions today are likely to represent a steep fall from grace. Similarly, if you invest in Amazon or Apple now, you’re expecting them to replicate their past few decades’ performance over the next. That’s quite the ask.

None

Investing or trading?

It’s perhaps with this in mind that investing has become a progressively more transient business. In the 1940s, the average holding period for stocks was seven years. By the turn of the century it had fallen to one year.

The trend was accelerated at the start of this year amid volatile markets that led to global market selloffs. Reuters suggests the average holding duration for US shares fell to around five months earlier this year.

Technology has also played a part, with the internet making it far easier to trade in and out of stocks, and with volatile assets like cryptocurrencies making regular movements more attractive. The ‘meme’ stocks, which attracted so much attention earlier this year, represent the antithesis to forever stocks. Reddit traders piled into the same companies, looking to get rich quick by jumping aboard their rocketing share prices. Outlooks were short-term and risks were high. Buffett was wincing. 

Trading and holding stocks forever form two different ends of the investing spectrum. While the former is in the ascendancy right now, not least among younger investors, it’s difficult to draw conclusions about which is ‘better’. In fact, comparing the two at all is unfair. They represent different investing styles, and style is ultimately subjective.

Leigh - captain of the anti-forever brigade - is no trader, but he does invest in companies based on regular fluctuations in their price. Once he’s bought a stock, he’s looking to cultivate his portfolio like he might prune the flowers in his garden. He’s constantly trimming or augmenting it depending on how well it grows.

If Leigh is busy cutting back the weeds and pruning the flowers, Aruna is happy to stand back and give his garden time to grow:

“In my view it is worth spending the time to really understand a few really good businesses you can buy and own for the long haul without constantly trying to trade in and out of what is ‘cheapest’ or ‘in vogue’ at any one particular time. I try and identify strong businesses which I can own for a long period of time in the fund.”

Their attitudes are reflected in the size of their portfolios. Where Aruna’s Fidelity UK Select Fund currently holds 44 companies, Leigh’s Fidelity UK Opportunities Fund holds 128.

For those of us who aren’t fund managers, understanding which approach suits you is the best investment move you can make. Feeling comfortable when you invest means you’re more likely to get on with doing it.

If you can’t face regularly monitoring your portfolio but still want to invest, buying a well-diversified fund with the intention of holding it for a long time could be your style. Here a multi asset fund like the Fidelity Select 50 Balanced Fund, or a global equity fund such as the Rathbone Global Opportunities Fund or Fidelity Global Special Situations Fund could be something to consider.

Keeping costs down is also important over the long term, so a global ETF such as the Fidelity Global Quality Income UCITS ETF or Vanguard FTSE All -World UCITS ETF could also be a sensible choice.

As Jeremy, manager of the Fidelity Global Special Situation Fund, puts it: “’Buy and hold’ is not necessarily a recipe for great performance, but it does make it easier to manage the portfolio!”

Five year performance

(%) As at 1 Oct

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Amazon 39.9 44.7 11.2 70.8 6.7

Past performance is not a reliable indicator of future returns

Source: FE, share price returns in USD terms as at 1.10.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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