For many of us, January 2016 has started off on a negative investment or financial note. Being human, we are hard-wired to feel losses more than we feel the benefit of gains. We begin to think of lowering short-term risk triggering a short-term re-assessment of markets as well as investments. This affects decision-making that is usually detrimental to long term investing.
Short termism may be rife in markets.
Returns in the short term are volatile and unpredictable. Individuals have little control over the information occurring in the short term. As such, there is a tendency to consider investment strategies with the lowest risk of short-term losses rather than those that offer the greatest potential for long-term gains. As a consequence, investors often forgo the prospect of bigger gains by selling their winning positions too early to avoid falling into a loss position.
It is rather idealistic to expect any strategy to deliver positive performance all the time. Factors beyond individual control can cause temporary setbacks. In the long term such setbacks are part of the journey and not a reason to abandon a successful investment.
One of the key tenants of building a better financial future is establishing a plan and implementing investment strategies. Setting long-term goals and choosing strategies that has a high likelihood of achieving the goals allows logical decisions to override emotional ones based on short termism. Taking a long-term view generally gives the strategies and the investments time to deliver. Regularly evaluating the underlying positions and your investment plan will ensure that the investment strategy journey is on track.
Nick Stratus – 26th January 2016