I have noted many times in these newsletters that the primary difference between successful people and unsuccessful people is their time horizon. Unsuccessful people have very short time horizons while successful people have long time horizons. (In finance terms, successful people have lower discount rates than unsuccessful people.) In other words, short-term thinking leads to “living for today” at the expense of the future.

Another important aspect of time horizon is how a client (or money manager for that matter) looks at a portfolio and the market. Is the goal to get the highest return this year? Never have a losing year? Some think that since the long run is merely a series of short runs, if you take care of the short run the long run will take care of itself. This is not true. The long-term goal for most investors is to achieve financial independence (i.e. working for money is optional). The best way to maximize the likelihood of accomplishing that is to stay focused on the goal while for the most part ignoring the short run.

In other words, focusing on day-to-day market gyrations or the economy as a basis for investment decisions does not lead to long-term success. One analogy might be weather vs. climate. Deciding where to live based on the current weather is foolish – it is the overall climate that matters. The fact that right now there is rain, or a drought, or a hurricane in the area shouldn’t be given much weight. Similarly, investing for the future is a marathon not a sprint. Imagine if a marathon runner’s race strategy was to run each of the 26 miles as fast as possible. The runner wouldn’t do very well overall, and even finishing would be doubtful for most runners. An important part of race strategy is pacing. It is poor strategy to run too slowly or too fast.

Similarly, an appropriate portfolio generally isn’t all high-octane investments that have high expected returns but might very well blow up completely. But neither is it usually appropriate to have a portfolio so conservative that it will never suffer a loss over the course of a year (or several).

On average, economies grow, companies profit, and investments increase in value – in the long run. In the short run, recessions, losses, and bear markets happen. You can think of market movements or changes to portfolio value as the movement of a yo-yo being played with by a person walking up a hill. Far too many investors (and managers) focus excessively on the movement of the yo-yo and miss the fact that the person is walking up a hill!

So in short, ignore the prognosticators excessively focused on the current news cycle and markets (even when markets are doing well, as now) and enjoy the holidays with your loved ones.

While Financial Foundations is intended primarily for our clients, we are happy to expand our readership so feel free to pass this along.

We have clients nationwide; if you know someone we may be able to help with their financial planning and wealth management, we would be happy to have a conversation. Please feel free to pass along our contact information.

Regards,
David

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