Growth assets are essentially property and shares. For different reasons, they need to be held for an extended minimum period. At Dover, our minimum holding period is ten years.
There are several reasons for this. The most basic reason is that growth assets can be volatile in the short to medium term. If investors are going to need their money back in any timeframe less than ten years, then that money should not be invested in risky growth assets.
Most people understand, at least generally, the volatility of equity markets. (The concept can also be made more complicated than it perhaps needs to be). Consider the price of shares in NAB on a random November day for each of the past nine years:
|November 2015||$29.91||November 2010||$25.97|
|November 2014||$32.60||November 2009||$28.75|
|November 2013||$33.92||November 2008||$22.15|
|November 2012||$24.30||November 2007||$38.30|
|November 2011||$24.58||November 2006||$39.60|
As can be seen, even nine years after November 2006, the shares were worth less than they were worth in November 2006. (This fall, however, will have been offset by dividends such that a shareholder who held shares for the ten year period will have made a small profit. That profit will have been less than the compounded inflation rate, however). But what if the investor who bought shares in November 2006 needed then to sell them in November 2008? Well, they have lost nearly half of their money. What if they needed to sell them after five years, in 2011? Well, again, they will have lost money. It is not until around November 2013 – seven years after the purchase, that the client would have made any money at all on their shareholding – and that depends on dividends and capital growth. It will also have been a very small gain over such a long term timeframe – nowhere near sufficient to justify the risk involved.
Property tends to be less volatile (although it can still be volatile). But property is an asset with substantial purchase costs – stamp duty alone can be up to six percent of the purchase price. This means that the value of the investment in property is immediately less than the actual purchase price – it simply must take time for the property to appreciate sufficiently to firstly offset this immediate fall and then to justify the risk involved in the investment.
That is why we set our minimum holding period for investments in growth assets at 10 years. Despite this, we regularly see SOAs using some lesser period – even as little as three years as the minimum holding period for volatile assets. Such short timeframes ramp up the risk and we do not think that they are therefore in the best interests of the client.