Of the cornerstone investor concepts, there is one that is more decisive than all others in delivering a superior investment outcome. We think it is not an exaggeration to say that mastery of this one thing is the differentiator between a good investor and an average one. If our field was physical fitness, this topic would be "eat well and exercise."
And yet, this crucial concept is not only chronically misunderstood, but it may be the one of the most unpopular, underestimated, and underappreciated, perhaps even loathed on occasion. Again, exactly like "eat well and exercise"! For most people, it is the thing that we know is very important but resist whenever we can. This pedestrian yet paramount principle is long-term versus short-term perspective.
People struggle to internalize this concept because it has become exceedingly cliché, because it is vague, and because it is not the natural way most people think. It is hard, while thinking in the short-term is as easy as not exercising. In this article, we will explore the distinction between long-term and short-term for investors, the challenges of adopting a long-term perspective, address the pitfalls of reacting to market events, and provide practical advice for overcoming short-term temptations and prioritizing long-term objectives. This is the third installment in my series of Investor Basics.
Long-term investing focuses on a time horizon of several years or even decades, emphasizing growth and compounding over time. Investors with a long-term perspective are less concerned about short-term market volatility and adopt strategies like factor investing, dollar-cost averaging, and tax-advantaged accounts.
Short-term investing, conversely, involves a time horizon of less than a year, aiming for quick profits through frequent trades based on market trends or news events. Short-term investors, such as day traders or swing traders, focus on immediate market fluctuations.
In investing, long-term is typically seen as a horizon of 5-10 years, allowing for smoothed market fluctuations and compound growth. However, it's more about intent and purpose than time—long-term investing seeks extended growth, while short-term investing targets immediate market changes.
Short-term market events can captivate and worry investors, making it challenging to adopt a long-term perspective. While long-term thinking might seem dismissive of short-term issues, mastering it is a significant advantage in capital markets. To succeed, investors need to understand the harm of short-term thinking and develop practices to counteract it.
The Peril of Short-Term Thinking
Short-term thinking can lead investors to make impulsive decisions based on market events, which can be crippling to their investment outcomes. When investors ask whether they should make changes to their portfolio in response to news events, they are engaging in short-term thinking. This approach can result in:
Missing out: Investors who attempt to time the market often end up missing some of the best-performing days. In fact, missing just the 25 best days in the market over a 20-year period would reduce the overall return by nearly 80%.i
Paying more: Frequent trading can lead to increased transaction costs, such as trading fees and taxes, which can erode investment returns over time.
Experiencing increased stress: Constantly reacting to short-term market fluctuations can lead to higher stress levels, which can cause behavioral errors that degrade overall portfolio performance. This leads back to even more stress.
Overcoming Short-Term Temptations
There are many parallels between physical fitness and investor fitness. To prioritize long-term objectives and navigate the challenges of short-term thinking, consider these practical tips:
Be realistic: Recognize that adopting a long-term perspective is not easy or natural for most people. Understand that it takes conscious effort to resist short-term temptations and focus on your long-term goals.
Develop a clear vision of the future you want: Set specific financial objectives and a time horizon for achieving them. Having a clear plan in place will help you stay focused on your long-term goals, even during periods of market volatility. Ask yourself: how is the worrying thing that is happening today going to alter my goals and the planning I need to accomplish them?
Balance and moderation: Create a well-diversified portfolio tailored to your risk tolerance and investment objectives. Ensure that this portfolio contains sufficient liquidity and flexibility for the unexpected. This strategy will help you stay invested during market downturns and avoid the temptation to make impulsive decisions based on short-term events.
Establish a routine: Schedule periodic reviews of your investment portfolio but avoid obsessing over daily or even monthly fluctuations. More frequent observations will not improve performance but will increase stress, potentially leading to impulsive decisions and investing errors. Stick to your review schedule and resist the urge to make impulsive changes based on short-term events.
Seek professional advice: Working with a financial advisor can help you navigate the complexities of investing, stay focused on your long-term objectives, and avoid making impulsive decisions based on shortterm market events.
The good news is that like exercising and eating well, maintaining a long-term perspective is only hard until it becomes habit. Indeed, the former is the defining trait of the healthiest people, and the latter is the essential view of the most successful investors.
The easiest way to start eating well is to stop eating badly. The easiest way to foster a healthy long-term view is to stop consuming news that hacks our brains and keeps us fixated on the short-term.
You may have heard me say: "The beginning of investing wisdom is the realization that long-term outcomes are the only ones that matter." This is true, but easier said than done. We are here to help you stay oriented towards long-term success, and I hope that this article has helped as well!
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
Financial Adviser, RJFS
27499 Riverview Center Boulevard, Suite 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. The information provided has been prepared from sources believed to be reliable but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Dividends are not guaranteed and must be authorized by
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i Sources: Dimensional Fund Advisors. Used with permission. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. "One-Month US T- Bills" is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.