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“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

— Warren Buffett

The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?

A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Travelers Companies Inc (NYSE: TRV) back in 2010. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:

Start date: 03/23/2010
$10,000

03/23/2010
$21,212

03/20/2020
End date: 03/20/2020
Start price/share: $53.90
End price/share: $89.51
Starting shares: 185.53
Ending shares: 237.04
Dividends reinvested/share: $23.48
Total return: 112.18%
Average annual return: 7.81%
Starting investment: $10,000.00
Ending investment: $21,212.43

As shown above, the decade-long investment result worked out well, with an annualized rate of return of 7.81%. This would have turned a $10K investment made 10 years ago into $21,212.43 today (as of 03/20/2020). On a total return basis, that’s a result of 112.18% (something to think about: how might TRV shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]

Notice that Travelers Companies Inc paid investors a total of $23.48/share in dividends over the 10 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).

Based upon the most recent annualized dividend rate of 3.28/share, we calculate that TRV has a current yield of approximately 3.66%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 3.28 against the original $53.90/share purchase price. This works out to a yield on cost of 6.79%.

One more investment quote to leave you with:
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” — Peter Lynch