Warren Buffet, famous American investor and the man behind the enormously successful Hathaway Group, has a simple philosophy when it comes to equity investments: buy and hold.

Too often investors feel the need to purchase far too many shares, he warns, rather than wait for that one exceptional company. Most investment experts suggest that an ideal portfolio should consist of stock holdings in about 10 companies and certainly not more than 12. Tinkering with a portfolio each day is also unwise. And unless you can watch your stock plunge 50% without panicking then you shouldn?t be in the stock market game at all.

These sobering thoughts are no less illustrated by research carried out by Philip Ryland and the subject of an article The Economist.

In a nutshell: investment risk diminishes, and returns stabilise with time. For example, the following table uses the FTSE100 (Financial Times Stock Exchange 100) indices since 1974 to show the limits of returns during various time periods. As can be seen, anyone holding in equities during any consecutive five-year period had a minimum (compound) return of 8% per annum, and a maximum of 36%. Over 20 years the minimum and maximum returns had narrowed to 12% and 18% respectively.

Clearly, as the investment horizon lengthens, the investor moves into profit, and his profit stabilises:
Annual average percentage return

Holding period in years Minimum Maximum
1 -59 159
5 8 36
10 12 25
15 13 22
20 12 18

From other research by The Economist, in the ten decades from 1891 to 1990, only one of them, the 1930s, had the inflation adjusted return from bonds been better than the real returns of equities.

In just two decades did common stocks fail to make a return that was higher than inflation: the period 1910-1919 and the 1970s.

? Datawrite Publishing Limited 2001 - ? Insurance Times & Investments