By Paul Tracy
There is a troubling trend among U.S. investors, and it's causing them to miss out on millions of dollars of potential profits.
In the past 50 years, the average holding period for stocks has dwindled from eight years to just eight months.
There's no doubt that lower average has been affected by the rise of computer-based high-frequency trading.
But it has also been affected by the rise of individual investors and online brokers. Decades ago, few people had a brokerage account. And buying or selling a stock meant visiting or calling a stockbroker.
These brokers typically charged high commissions of $40... $80... even several hundred dollars or more. Today, most trades are made with a click of a mouse and for no more than $10 in commissions.
Combine that ease of trading in and out of stocks with the market's volatility and you have the perfect recipe for something that has proven disastrous for most small investors -- they are now holding their shares for unbelievably short periods of time.
The problem with this trend is that it's hurting how much money investors make in the stock market.
I recently ran a simple stock screen on my research team's Bloomberg terminal. I asked this piece of research software to show me all the stocks in the United States that have returned more than 250% in the past year. And to weed out the fly-by-night penny stocks, I had it return only stocks with market caps above $250 million that traded on a major exchange.
The result? Just five stocks -- five out of a total universe of 3,258 companies -- have gained more than 250% in the past year. That's the definition of trying to find a needle in a haystack.
In fact, I bet you've never even heard of any of these stocks... much less own any of them:
But then I ran the exact same screen... only I changed the time period to the past 10 years. The results are night and day.
In the past 10 years, more than 450 stocks returned more than 250%. That's roughly 100 times as many as the past year.
That's because the market's greatest winners -- not the extremely risky plays that skyrocket and crash seemingly overnight -- take years to reach their full potential.
They won't do it in one year... or even two or three years. But investors who hold these stocks for the long haul will steadily compound their gains year in and year out.
Take a well-known case -- shares of Apple (Nasdaq: AAPL). Apple has been one of the market's best performers for years. But even in the stock's best one-year period, investors made 289%.
I wouldn't sneeze at a 289% gain, but anyone who bought for a year... or an even shorter time... sold themselves short.
You can see from my chart that Apple wasn't done after six months or a year...
Since the beginning of 2003, Apple has gained more than 8,000%. That's an average annual gain of 59% and enough to turn every $100 invested into more than $8,000.
Investing for a short period in a stock like Apple is like ordering a seven-course meal and only sticking around for the appetizer. Sure you get a taste... but wouldn't you rather have the whole meal?
And yet, as I was telling you earlier, the average holding period for stocks has fallen to less than eight months.
I think that's a mistake. I'm not saying you should buy and hold every investment for decades. But what I've discovered is that it's the few investments you simply buy and hold for the long run that make the biggest difference to your long-term wealth.
And if you invest exclusively in the world's greatest businesses -- the exact same kinds of companies I recommend in my premium newsletter, Top Ten Stocks -- then you won't have to worry about the daily ups and downs of the market.
Disclaimer: Paul Tracy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.