Long-Term Investing and the Frequency of Investment Decisions

This article analyzes the impact of the frequency of investment decisions on long-term investment results. Long-term investment returns are shown to be a nonlinear function of skill, transaction costs, volatility, and frequency. The author uses compound returns to show the minimum skill level that is required to result in a positive expected return after costs and shows the skill level required to outperform the buy-and-hold investor. These can be high for markets that have high transaction costs per unit of volatility. The optimum frequency of investment decisions is derived as that frequency that maximizes the expected terminal value of wealth. Empirical estimates from the US equity and fixed-income markets show that this optimum frequency is considerably different between these markets, even when the investor has an equal amount of skill in each. The author also shows how long-horizon value-at-risk varies with the frequency of investment decision-making.