If people put money away for long-term goals rather than near-term expenses, why are their investment decisions so short-sighted? Over the past 30 years, we've seen investment time horizons become shorter and shorter. A parent with 15 years to save for college might actually change investments after three years—less time than it takes for their child to earn a degree. The sponsors in charge of overseeing retirement plans, with investment horizons that are measured in decades, are making decisions based on track records as short as one year. There's a dangerous disconnect between distance to the goal and investor behavior.
It's about time we address the investment horizon dilemma. That's far more pressing than what I often get asked about—the active/passive debate. Like growth and value strategies, active and passive each have their roles and can co-exist in a portfolio. What can't sit side by side is short-term thinking and long-term goals. Many investors have become performance chasers, investing in the moment, not for the future. And they've lost sight of their greatest asset—time.
In recent years, holding periods for stocks have shrunk to an average of less than a year. From risk-on/risk-off to the proliferation of narrowly focused ETFs, a trading mentality has gripped the industry as everyone tries to guess which way the markets are heading. That's a tough way to make money—and it's largely unsuccessful.
And yet, many investors are still caught up in the short-term frenzy—constantly trading in and out of funds. Often that means selling managers with proven long-term records to buy the current flavor of the month. In most cases, these investors are buying high and selling low—a surefire way to destroy value.
Short-Termism Is Pervasive
Although buy and hold is an easy concept to understand, it’s become increasingly hard for investors to embrace. Even more experienced investors have started to succumb to short-term pressures.
In fact, in a recent MFS survey of the people who oversee U.S. retirement plans, 60 percent said they consider a track record of three years or less when hiring an investment manager. And 75 percent said they would put a manager under review for underperformance over one or three years.
This short-term thinking makes no sense. These individuals oversee retirement plans with investment time horizons as long as an employee's entire professional career. Yet they're making buy and sell decisions based on time periods shorter than it might take an employee to go from one job grade to the next.
Give A Bull And A Bear
You can only judge the success of any investment strategy, or the relative skill of any manager for that matter, by looking at how they perform in both a bull and a bear market. Investment strategies that attract lots of money by putting up eye-popping returns when markets are rising often blindside investors when the markets turn. It's better to find investment managers who hold up well through both—which takes a good seven to 10 years or a "full market cycle."