Jonathan Theunissen, CFP® – Financial Planner

The Pitfalls of Short-Term Investment Tracking

An interesting contrast exists in the world of investments: while property investors rarely fixate on annual valuations, many equity investors obsessively track their portfolio’s short-term performance. This behaviour is not only counterproductive but also misaligned with the fundamental principles of successful long-term investing. Let’s explore why this is the case and why a focus on long-term performance is essential for achieving financial goals.

Understanding Investment Horizons

When you purchase a property, you typically have a long-term horizon in mind. The motivations behind property investments are often rooted in expectations of gradual appreciation and rental income. As a result, property owners generally refrain from frequent valuations, understanding that real estate values fluctuate due to numerous short-term factors that don’t reflect the long-term potential of the investment.

Similarly, equity investments are best viewed through a long-term lens. History has shown that, despite short-term volatility, shares provide superior long-term returns compared to property. The equity market rewards patience and perseverance, with compounding growth significantly enhancing wealth over extended periods.

The Fallacy of Short-Term Fixation

Why, then, do so many equity investors fall into the trap of short-term tracking? The answer lies in a combination of psychological factors and the nature of financial markets. The availability of real-time data and a continuous news cycle can lead to an overwhelming focus on daily market movements. This constant influx of information often triggers emotional reactions – fear during market downturns and exuberance during rallies – which can lead to impulsive decision-making.

The graphic below, by FinaMetrica – using Morningstar data, shows the benefit of tracking investment values less frequently.

The less often we check our investments, the more comfortable our investment journey becomes. This is because markets generally rise more than they fall, and over longer periods, growth tends to outweigh temporary selloffs.

We need to recognise that we are emotional beings but that investment decisions based on our emotions will land us in trouble. It is vital to keep our emotions in check and one way to do that is to commit to a financial plan, based on our values, goals, and financial resources.

This means establishing a well-diversified portfolio that considers the investor’s risk tolerance, investment horizon, and required return.

The Wisdom of Long-Term Investing

A long-term investment approach aligns with the inherent nature of equity markets. The power of compounding – the process by which investment earnings generate their own earnings – requires time to work its magic. Historical data illustrates that those who remain invested through market cycles achieve better outcomes than those who attempt to time the market.

Practical Steps for Investors

• Set Clear Goals:

Define your financial objectives, whether it’s retirement, education funding, or wealth accumulation. Understanding your goals will help you stay focused and resist the temptation of short-term tracking.


• Diversify:

Spread your investments across various asset classes and geographies to reduce risk. A diversified portfolio can help smooth out the bumps of market volatility.


• Regular Reviews, Not Reactions:

Conduct periodic portfolio reviews to ensure your investments are aligned with your goals and risk profile. Avoid reacting to short-term market movements; instead, adjust based on long-term strategy.


• Stay Informed, Not Overwhelmed:

Keep abreast of market trends and economic indicators but avoid the trap of information overload. Focus on long-term trends rather than daily news.


• Seek Professional Guidance:

A financial advisor can provide valuable insights and help you maintain a long-term perspective. Professional guidance can be particularly beneficial in navigating market complexities and staying disciplined.


Conclusion

Investors should understand the value of patience and long-term vision, embracing these principles to achieve successful investment outcomes.

By shifting focus from short-term fluctuations to long-term goals, investors can harness the true potential of markets. Remember, history favours those who stay the course, allowing time and compounding to work in their favour.