Short-Termism – The Enemy of Investment Success

Short-Termism. Myopia. Standing too close to the elephant. Taking a short-term view of a situation can be explained using a range of terms and analogies, and typically not in a positive way. Looking at your investments through a narrow lens is absolutely no different. The 24-hour news cycle and constant bombardment of information and opinions rarely does investors any favours, leading to poor decision-making and stress about the performance of their investments. Having this sort of reaction is natural and understandable, but keeping your eye further ahead is the key for making sound decisions and improve your chances of investment success.

Embracing a Long-Term Investment Perspective

In times of unpredictability and market turbulence, it is crucial to maintain your composure and adopt a long-term investment outlook. The investment journey is a marathon, not a sprint, and it is common for markets to experience fluctuations that on the face of things seem worse than they really are. Weathering market fluctuations is part of the game, and bear markets (falls of more than 20%) typically have shorter durations than subsequent rising markets (bull markets). Adopting a narrow-minded, short-term perspective during market volatility can result in impulsive decision-making, which poses a significant threat to your investments. This can lead to missed opportunities for gains when the market bounces back, as it’s impossible to time the market, and most people wait until the market has recovered before getting back in, missing out on crucial price recovery.

Understanding Your Risk Profile

It is vital to customise your investment strategy according to your risk profile, which is influenced by various factors such as investment goals, risk tolerance, capacity for risk, life stage, the prevailing economic climate, and more. When creating an investment strategy, your financial adviser will consider all of these factors to determine the appropriate approach for your situation and build that into your financial plan. Like any plan, it should be reviewed and updated regularly. Significant life events or changes to legislation could send your plan off course and change your risk profile; and new opportunities may emerge that also need to be considered. Reviewing your plan with a financial adviser can ensure that you continue to make steady progress towards achieving your objectives.

Playing the Long Game for Compounding Returns

Maintaining a long-term investment perspective has become increasingly important in recent years. The COVID-19 pandemic caused investors to panic in 2020, leading to sharp market falls of more than 35%. Despite this significant decline, markets bounced back remarkably quickly. This underscores the significance of examining investment returns over an extended period where genuine trends emerge. Vanguard reports that “a $10,000 investment made into Australian shares in 1992 would have achieved a 9.0 per cent total return per annum if all distributions had been reinvested and grown to $131,413 by 30 June 2022”. (A similar investment in US shares would be worth $182,376, a compound return of 10.2% per annum). It’s worth noting that this 30-year period encompasses major economic upheavals such as the 2007-08 Global Financial Crisis, the 9/11 terror attacks, the dot-com market crash, the COVID-19 market crash and the Ukraine crisis. This indicates that a long-term investment perspective can assist in achieving your investment objectives, even in the face of significant economic shifts.

Turning Your Short-Termism into Effective Investment

As we opened with in this article, it’s totally understandable to be concerned by market volatility, especially when you look at the direct impact on your own investments. Aside from taking a step back and understanding the reasons for short-term fluctuations, having an ongoing advice relationship with a financial adviser can add a layer of comfort. Their knowledge and experience can provide you with reassurance and ensure that you don’t make any rash decisions in the face of volatility. The advisers at People + Partners do exactly this for our clients – if you’d like to see how we can help you reach your financial goals and grow your wealth, call us today on +61 2 9093 1311 or contact us via the website.

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