Why Short-Termism Hurts Investors

August 6, 2015

2 minute read

Earlier this year I spoke about the problem of “the long-term”. This is the tendency for modern finance to emphasize a long-term view due to the fact that assets tend to perform well over the long-term. This is empirically true. If we look at the performance of stocks, bonds and the broader economy the performance tends to skew to the upside the longer your perspective is. Unfortunately, as I’ve noted, everyone doesn’t have a “long-term”. In fact, even most young people live a life of short-terms inside of a long-term. Our financial lives aren’t this start and stop ride where we get on when we’re young and get off when we retire. At times the ride stops along the way and we have to get off for marriages, new homes, college expenses, emergencies, etc.

That said, we also shouldn’t be in the financial markets if we have a short-term perspective. That is, given that you have to expose yourself to principal risk with any financial instrument with more than a few months of duration, you can’t be remotely long-term if you have no stomach for principal loss. This is particularly pertinent at times like these when we’re going through a substantial commodity unwind and foreign market turmoil. It’s a near certainty that any well diversified portfolio has at least some exposure to these events.

The reality is that most of us have a multi-temporal or a cyclical time frame of the financial world. It’s neither a long-term nor a short-term. It’s usually something in the middle. And when we veer too far in one direction or the other we tend to get in trouble.

The problem with the short-term is multifaceted:

A short-term view tends to result in account churning, higher fees, higher taxes and lower real, real returns.
A short-term view often results in reacting to events AFTER the fact rather than knowing that a well diversified portfolio is always going to experience some positions that perform poorly in the short-term.
Short-term views are generally consistent with attempts to “beat the market” which is a goal that most people have no business trying to achieve when they allocate their savings.

If you have an excessively short time horizon you probably aren’t going to respond well to market turmoil. I’ve found that there is nothing more difficult in the investment world than understanding how the concept of time applies to someone’s portfolio. As with so many things in life the truth often resides somewhere in the middle. And if you can maintain that cyclical view without being irrationally long-term or short-term you’re very likely to achieve performance that is in-line with your broader financial goals.