The gloomy scenario spread around the world due to COVID-19 restrictions have wreaked havoc on the financial health of many families and businesses. Too many investors lost their life savings in the March-2020 crash and could not make up afterward in the inexplicable bull run.
This gloom-and-doom has one more effect on the psychological makeup of people. They start thinking of short-term investing instead of focusing on long term investing.
Benefits of long-term orientation in Life & Investing
Relax, our brains are wired that way.
As evolutionists tell us, our ancestors were living in jungles for millennia before they started agriculture and building societies. The agrarian society is only 12,000 years old compared to the human race’s history of 2.8 million years!
For that long, the human race focused on the immediate –movements in the bush, unknown sound in distance – to survive and find food. Today in complex societal situations this short-term bias works against us most of the time.
The problem is that our brains are wired to act and react as if we are still living in the jungles, and actually, we are not. Ronald Wright in his book A Short History of Progress, says that humans are operating 21st-century software on 50,000-year-old hardware and its results could be catastrophic.
Finances and Investing are two areas where this cognitive bias plays havoc, if left uncontrolled. With every blip in the ticker on the screen, our brains hear strange sounds behind the bushes, our heart races, we run all doomsday scenarios in our minds and react in fear.
In investment a long-term process is more important than short-term outcomes.
— Hemant Beniwal, CFP (@hemantbeniwal) May 13, 2021
How do we cultivate the Long-term orientation then?
We must understand and accept that, as a race, we are not good at placing our present in the long-term view of things. In the current scenario, it may seem hard for someone to deploy their money for the long term. The volatility in the markets constantly triggers base instincts of freeze, flight, or fight.
We consciously need to break out from this trap. Here are some great reasons why long-term orientation is useful:
Keeps you calm.
If you are feeling despair and hopelessness, remember that capital markets are not rational. If you could just calm yourself, you would realize that this is not the first disaster in human history – thousands of battles, two World Wars, too many severe economic crises & shocks, and even deadly diseases – have been there.
Humanity stood up, dusted, rebuilt, recreated, and restored the world order every time. The people, societies, businesses, and countries who planned for the long term, really prospered and became better. Even during the current COVID-crisis, countries like New Zealand or Taiwan planned for the long haul and have restored ahead of the rest of the world.
With composure, you could see that each crisis is just a blip in the long-term trend of continuous growth, development, and prosperity of humanity.
No rush to time the market.
With defined long-term goals, short-term needs, and an emergency fund, we would not feel the urgency or necessity to time the markets. You would plan for emergency and immediate needs first before making long term investments. This way you will have a cushion for stressful times.
Also, timing the market is not possible for even full-time traders, let alone most ‘investors.’ It is impossible to get each call right based on something coming to light a few minutes earlier. The same economic event can affect different segments of the market in different ways, and their impact to is hard to judge.
Better hedging or simply Diversification
A catastrophic event for some asset-class/market might prove to be a blessing in disguise for some other asset-class/markets. With long-term orientation, we follow the principle of “never put all eggs in one basket,” and hedge risks.
With diversification, we accept our limitation that we cannot see the future. This acceptance makes it is easier to build a portfolio giving decent returns in stable times and can withstand serious shocks far better than any other asset mix.
See the big picture.
Too much focus on the hype around products, companies, IPOs, NFOs, and rosy projections related to their performance has left many investors poorer. When you see the big picture, you realize that in the long term as businesses grow their stocks, grow. But as not all businesses do well, their stock will fail eventually.
With long-term orientation, instead of being swayed by the frenzy or the fear, you will make calculated bets, most likely against the tide. As Warren Buffet famously said, “Be fearful when others are greedy, and be greedy when others are fearful.” You will look for value in under-priced assets like just after a crash, or an under-reported small/mid-cap stock.
Once we factor in the diversity and stability of the portfolio, where preservation of capital is more important than appreciation in it, we set our expectations on solid ground. Now any fly-by-the-night operator cannot sell us snake-oil fleece us.
We will be wary of any long term investment proposals that ‘guarantee’ us 100% or even 30% percent-plus returns in a short period. Each asset class and market have their own grounded range of returns – for example, for Indian equities, it is 12-14 %, gold gives 6-8% returns, and quality bonds give 7-8% returns over the long term. A balanced portfolio, build with advice from a financial planner, can fetch you 10-11% annualized returns but with volatality.
Finally, having self-discipline in one field where it is difficult to control emotions for most humans, can make us a better person in everyday life. Remember all good habits and virtues, just like vices and bad ones, affect every aspect of life.
It is not easy to compartmentalize behavior and habits just because you are in a different setting. Frustrations from your investment’s performance can spill over into your personal life, and vice versa.
To wrap up.
Trying and difficult times like today are as much a threat to a fragile mind as they are an opportunity for a strong one. We may make this an opportunity by practicing self-discipline, tuning out of the market noise, and acquiring and strengthen our long-term Investment.
If you want to improve your long-term outcomes – schedule a call with us.
A financial advisor can act as your mentor and guide with whom you can discuss all your impulses and they can tell you which ones are justified or not. They can also help you not lose focus from your goals and the golden rule from Warren Buffet – Return OF Capital is more important than Returns ON Capital!