Resist Short-Term Temptations
We expect our texts to be answered immediately, take pills to try to lose weight fast and, because Amazon Prime’s free two-day shipping isn’t enough, the company has introduced same-day grocery delivery. (1) We live in an Amazon world one in which we demand instant gratiﬁcation. As such, those who anxiously approach retirement often look for ways to grow assets quickly. While instant gratiﬁcation can be met on many fronts, investing takes time, a healthy dose of wisdom and a dash of self-restraint to resist short-term temptations.
The short-term mindset has permeated more than mainstream society; it’s also part of our corporate culture. Some companies have made it a habit to ﬁnancially engineer short-term gains in an effort to attract and retain shareholder investment. In turn, shareholders are led to believe they can expect that same level of performance quarter after quarter, year after year. Some of those shareholders are activist investors who purchase a large number of company shares in order to exert inﬂuence on company operations.
However, this myopic need to meet quarterly expectations has impeded long-term investment for many companies. Economists call this phenomenon “short-termism,” which is often characterized by a lack of expansion of jobs and productivity, long-term investment and innovation, and ultimately a reduction in genuine earnings growth. This approach can, and to some degree has, undermined America’s economic development, slowed GDP and reduced investment returns for shareholders. (2)
In 2013, global consultant McKinsey & Company conducted a survey of more than 1,000 board members and C-suite executives to measure their long-term approach for management. Here’s how they responded:3
- 63% said the pressure to generate strong short-term results had increased over the previous ﬁve years
- 79% felt pressured to demonstrate strong ﬁnancial performance over a period of just two years or less
- 44% said they use a time horizon of less than three years for setting strategy, while 73% agreed it should be more than three years
- 86% recognized that a longer time horizon would positively affect corporate performance by strengthening ﬁnancial returns and increasing innovation
- 46% said that the pressure to deliver strong short-term ﬁnancial performance came from board members, who in turn said that pressure came from institutional investors
What Does This Mean for Investors?
In some ways, short-termism is a domino effect that can begin in the upper levels of a company’s management team. However, if investors can break free from a “trading” mentality and embrace the “buy-and-hold” mentality, this will relieve the pressure on companies to deliver on short-term performance targets or risk losing investors. (4)
Clearly, the risk of losing shareholders is a big incentive. So, even if you don’t have the inﬂuence of an institutional or activist investor, you can use your investment dollars to proactively select companies that are more focused on long-term plans. Conduct the due diligence necessary to help you understand each company’s long-range goals and operational plans. After that, the strategy is simple: Buy and hold. After all, trading in and out of the market can cause you to miss out on gains, as the historical performance in the chart below demonstrates. (5)
Returns of S&P 500
Moving away from short-term investing offers additional advantages to the average individual investor. For example, frequent buying and selling generates higher trading costs and active money management fees. That means investment decisions on short-term trades need to be particularly lucrative to cover the cost of making them. In lieu of the time, energy and cost that may not provide higher returns, the smart move may be to align your long-term planning goals with companies who share a similar investment horizon.
Experts Weigh In
Warren Buffett, chairman, CEO and largest shareholder of Berkshire Hathaway, is well-known for his buy-and-hold philosophy. In a 2016 interview with CNBC, he reiterated this advice for investors, commenting that, “I never know what markets are going to do. In terms of what’s going to happen in a day or a week or a month or a year, I never felt that I knew it then and I never felt it was important. I will say that in 10 or 20 or 30 years, I think stocks will be a lot higher than they are now … A great strategy is just to buy stocks consistently over a lifetime and not worry too much about whether they go up or down in any given month or year.” (6 )
In an interview last year with Business Insider, Jack Bogle, founder and retired CEO of The Vanguard Group, stressed the importance of thinking about investments as the means of accomplishing a long-term goal, not a short-term return: “Investors make a big mistake by thinking too much of the value of the account and not enough about the monthly income they want to get.” (7)
“Only when investors pose the right questions will companies begin to feel the pressure to reorient their decisions around long-term strategies as well as reorient their communications toward issues that matter over the long term.” (8)
We work with each of our clients to design a personal ﬁnancial strategy tailored speciﬁcally for their long-term needs. We don’t design plans for quick returns, so even if investments experience a short-term decline, we’re not worried. If stock prices never ﬂuctuated, we wouldn’t have good buying opportunities. The primary goal is to understand what you’re investing in, choose investments with strong long-term fundamentals, and resist the temptation to jump in and out of short-term opportunities.
1 Masuma Rahim. The Guardian. June 6, 2016. “Amazon Fresh is a triumph for the culture of instant gratiﬁcation” https://www.theguardian.com/commentisfree/2016/jun/10/amazon-fresh-culture-instant-gratiﬁcation. Accessed Jan. 25, 2017.
2 Kelly Tang and Christopher Greenwald. S&P Dow Jones Indices. April 2016. “Long-Termism Versus Short-Termism: Time for the Pendulum to Shift?” http://us.spindices.com/documents/research/research-long-termism-versus-sh ort-termism.pdf. Accessed Jan. 25, 2017.
5 Sam Ro. Business Insider. Oct. 26, 2014. “If You Missed The Rally, Then You Just Made The Most Classic Mistake In Investing.” http://www.businessinsider.com/investors-miss-stock-market-rallies-charts-201 4-10. Accessed Jan. 25, 2017.
6 CNBC. Feb. 29, 2016. “Warren Buffett CNBC Transcript.” http://www.cnbc.com/2016/02/29/cnbc-transcript-of-warren-buffett-on-squawk-box.html. Accessed Jan. 25, 2017.
7 Rachel Levy. Business Insider. Jan. 24, 2017. “The man who transformed investing for Main Street sees a bleak future for Wall Street’s money managers.” http://www.businessinsider.com/vanguard-jack-bogle-401k-active-management-index-investing-2017-1. Accessed Jan. 25, 2017.
8 Kelly Tang and Christopher Greenwald. S&P Dow Jones Indices. April 2016. “Long-Termism Versus Short-Termism: Time for the Pendulum to Shift?” http://us.spindices.com/documents/research/research-long-termism-versus-short-termism.pdf. Accessed Jan. 25, 2017.
The advisory firm providing you this report is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investment advisory services offered through AE Wealth Management, LLC.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management. This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.