We live in a world where information is instantaneous. We watch and hear about world news and events virtually in real time. We get impatient when that download takes more than a second. We are spoiled. And we want more information faster. Instantaneous information is great when you are buying a car or booking a room online.
Instantaneous information is certainly available in the world of finance and investments, and that is a problem. To become a successful investor, one needs patience, understanding and a long-term view of things. Short term investment decisions are dangerous and have a low probability of success. I like to say that being a successful financial advisor is exactly the opposite of being a good weather forecaster. The accuracy of a weather forecast diminishes over time. In the investment world the opposite is true. The odds favor a long term investor. The trick is to remain a long-term investor in a short term world.
Folks also have trouble with investment cycles. Investments have up and down cycles that take time to unfold. Those down cycles just seem to last so long. You can make that short term guess about when to get in or out of that investment. The temptation is great! The odds are terrible! Or you can painfully wait for that down cycle to run its course and start the next advance. As an example, emerging markets have been submerging markets for three or four years. That’s a long time to wait for things to get better. If you had your investment review on February 1, 2016 the one year return for emerging markets was -18.97 percent. Since that time emerging markets are up 26.2 percent through October 11, 2016. The long term direction of stock cycles has been upward. Your brain knows that, but your heart isn’t listening. You feel like you need to do something. Don’t! Patience please.
Investors also have trouble with putting investment returns in perspective. We report performance to our clients over one, three, five, ten and inception time frames. If the one year return has been disappointing (we all wish that investments went straight up all the time) it naturally causes concern. The way you deal with that is to look out longer term. A poor investment year will have little effect on your ten year returns. You need to know that. Again, we are back to that long term time frame.
The general direction of the world’s stock markets has been northeast, for a very long time. Successful investors need to have the time to give their investments the time to work. The odds of being a successful investor (and your comfort level) get better over time. Your investment time frame is your life expectancy. Live long and healthy!
Michael J. McNamara, Ph.D., CFP
Certified Financial Planner
*Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.
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