Stock and bond markets are noted for catching investors by surprise.
Investors need constant vigilance when dealing with endless change.
Embracing the art and science of long-term perspective is top priority.
“Our favorite holding period is forever.”
— Warren Buffet, the Oracle of Omaha
The first quarter 2018 will be remembered for tenacious and persistent turbulence. Along with plenty of bouts of sudden uncertainty. Investors are still feeling its far reaching effects. However, I fear they may be too happy for this chapter to take its rightful place in the scrolls of financial history.
Before you close the book, take a moment to reflect on your investment experiences of early 2018. Specifically, what you can learn from them. Those experiences that nobody looks forward to repeating anytime soon! Although, you read it here. Volatility will not disappear.
Sit back, get comfortable and ponder the question, “How short is your long-term perspective?” Another approach asks how much bumpiness you can handle while stewarding your nest egg for the long haul.
Investing tries to achieve returns that deliver on long-term goals, such as the family retirement. However, too many investors have lost sight of the meaning of long-term strategy. Any time is appropriate time to ponder this important question.
A fitting long-term investment perspective is a vision of at least five years, preferably much longer. Thus, it’s important for each investor to reflect on the meaning of long-term perspective as it relates to the personal situation.
Over time, many investors become preoccupied with performance and instant gratification. When this happens, investment perspective is compromised, patience becomes a virtue in short supply and the “flavour of the day” portfolio takes a firm grip.
Investors have also become glued to the deluge of daily headlines and expert advice. Consequently, emotions drive many investment decisions and portfolio changes occur with little regard for the long-term implications.
I summarize key observations on investor habits:
- Investors spend too much time on the selection of every stock and mutual fund.
- Investors spend too little time on the strategies they ought to follow to reach their personal goals. Investors easily embrace the euphoria of picking winning stocks and mutual funds.
- The occasional investment home run is exciting, but it’s the losers that inflict serious portfolio damage.
- Investors often buy practically anything just to be invested. The months of January and February of the “RRSP season” provide solid evidence.
- Investors seldom build a home without a plan. However, too many of those same investors build their financial house without a hint of a game plan.
These habits are best changed as soon as possible. There is no value in pursuing strategies that don’t deliver.
Let’s put long-term investment strategy in perspective. Studies have demonstrated that asset allocation policies have the greatest impact on portfolios. Not stock selection, nor market timing.
Sit back, get comfortable and ponder the question, ‘How short is your long-term perspective?’”
Asset allocation is the combination of the choices of asset classes, such as cash, bonds and equities. Further, it’s the choices of asset mix, such as large versus small companies, that make up portfolio compositions. Conservative investors have low exposure to equities, whereas aggressive ones have high exposures.
The interesting findings of a well known study concluded that over time, asset allocation explained 93.6% of the variation in portfolio returns. It is very clear to me. If asset allocation is not the focus in your investment portfolio, it ought to be.
Accumulating a successful portfolio is a marathon, not a 100-yard dash. Accordingly, investors need to rediscover their long-term perspective. I outline some long-term commitments that pave the way for successful portfolio outcomes:
- Develop a written asset allocation plan consistent with your personal goals, investment time horizon, investment personality and acceptable risk levels.
- Be confident in your chosen strategy. This removes the tendency to make investment decisions based on emotions.
- Discipline yourself to stay the course throughout the many correction periods. Some will be dramatic, frequent and lengthy.
- Demonstrate patience with your chosen strategies. A long investment horizon increases your probability of success.
- Muster the courage to ignore the daily bombardment of conflicting research and expert advice instantaneously available from every nook and cranny.
My premise is that portfolios should be guided by well thought out game plans that withstand the tests of time. Investments can be risky when the investment horizon is shorter than five to seven years.
The centerpiece for financial success is the long-term game plan that outlines the investment policies investors will follow to reach their goals. The proven approach to a successful portfolio is with the long-term investment perspective.
Investors who concentrate on investment policies and strategies make better portfolio decisions. They are also rewarded with returns more in keeping with their expectations. It becomes a mindset.
Take the time to reflect upon your long-term perspective. Make your understanding of that vision a priority. It’s an essential part of successful investing. So resist the wall of worry of staying invested, especially in volatile times.
Your investing journey will be far from smooth. Do expect some bumpy encounters with rough patches. Grip the wheel firmly and focus on the art and science of your long-term perspective. The added benefit is that volatility is better kept in check.