The Investor Disease
Do you have the investor disease? It goes by the common name of Short-term-itis, and it’s catching. This particular affliction only affects investors — especially new investors. Young investors are highly susceptible to catching Short-term-itis.
While not a deadly disease, Short-term-itis can be hazardous to your financial health and long-term portfolio returns. Left untreated, the disease could potentially destroy decades of savings and cause a severe case of personal bankruptcy.
Many cases of short-term-itis can go completely undiagnosed for years, leaving investors with poor returns and equally small nest-eggs. Individuals with short-term-itis may need to delay retirement and continue working significantly longer.
Symptoms of the disease include:
1. Checking the price of your investments more frequently than once a week.
2. Buying an asset and selling it again within the span of 5 years.
3. Watching television financial news on purpose.
4. The trading of the assets due to relative underperformance when compared to other assets.
Sadly, there’s no known cure for Short-term-itis. However, the diseased can be managed with careful treatment over a patient’s lifetime.
Please seek medical/financial assistance immediately if you suspect you have short-term-itis or know someone who does.
Why Does Short-term-itis happen?
Ok, Ok, it should be pretty clear that I’m joking about this being a ‘disease’ in the medical sense of the word. But short-term-itis is a very real problem for investors.
In fact, I’d be tempted to say that most investors are going to fall prey to short-term-itis at some point in their life.
Why does it happen? Partly, I think it’s the desire to get rich quickly. Nobody wants to get rich slowly. They get bored or impatient. Investors want excitement. They change investments and chase better performance.
The news media might have something to do with it too — I’m sure you’ve seen all the news headlines reporting earnings being down one quarter or beating expectations another quarter:
“Company XYZ missed earnings projections and the stock is down 10% today.”
“Company ABC beat earnings projections and the stock rallied 3%.”
“Tech stocks are rallying this quarter due to excellent earnings.’
All of it sounds really important. The thing is, a quarter is only three months. That’s practically nothing on a business development timeframe. If you’ve ever worked on long-term company projects you’ll know they can take years from start to completion.
Quarterly numbers are like daily changes in the weather — look too closely and you’ll never see the long term seasonal trends.
For The Average Investor
The temptation to make short-term portfolio changes can be a powerful one… We hear about the latest changes in the economy, quarterly earnings numbers, the latest news on “trade wars”. It makes us feel like we know something about what the future holds.
All of it could have a really big affect your portfolio. Could is the key word. It’s possible those things might not have any effect at all!
For the vast majority of investors (those invested in diversified index funds), you have absolutely no reason to worry about any of it.
The index is eventually going to cull the losers and add the latest hot technology stocks of the day. You don’t need to lift a finger to invest in “good” businesses and divest “bad” businesses.
Your mission as an investor is to:
- Turn off the TV and ignore anything remotely resembling financial or economic news.
- Don’t touch your investments no matter how dire things might seem in the world.
- Put your short-term shades on and save like crazy. Save every dollar you can and invest it.
Sounds simple right? The trick is to keep doing it through the chaos.
Yes, recessions are going to happen and you won’t be able to predict them from watching the news. Quite simply, you can’t predict the future. Your portfolio is going to tank as a result.
Yes, you *might* have had the very bad luck of purchasing your assets at high prices. It can happen. But, if you manage to keep investing during the downturns you’ll eventually ‘average down’ and see decent returns again one day.
(Just hope the big crash doesn’t happen right after you retire)
During your accumulation phase some industries are going to see “boom times” and others will see stagnation and decay. You won’t be able to predict this. Keep the short-term shades on and remain oblivious to all of it. The index will handle the necessary “trading”.
Everything else you can ignore.
But what about more sophisticated investors? Can they get Short-term-itis? Yes, absolutely. They can contract a nasty case of it.
In fact, hubris could make sophisticated investors even more susceptible to Short-term-itis. The temptation to trade in and out of assets is a powerful one when investors have deep knowledge about a specific business (or industry).
It’s a form of investing commonly filled with traps and pitfalls. One that can trip-up even the most intelligent of investors. There’s death traps at every turn.
The odds of avoiding all those death traps seems entirely unlikely, yet many investors I know have done reasonably well investing in individual assets — whether that be a rental house, a small business franchise, bonds, or even stocks.
Why is that they do so well? The odds appear to be against their success…
Over the years I’ve developed something of an answer to this conundrum by simply watching some very successful investors:
- A successful real estate investor I know doesn’t ‘flip’ his properties. Even when the market is hot. His properties spit-off cash and he’s held them for decades.
- I’ve met a couple of very successful individual stock investors. They are very focused investors, holding around 3-5 individual stocks. They’ve held them pretty much forever and they only buy more shares when prices are favorable. It’s about as boring as investing gets, but they’re filthy rich.
- A couple of “bond millionaires” I know doggedly buy bonds under almost any market conditions. If bond yields are down, they simply adjust their spending down to keep compounding.
So what’s the common denominator here? In my experience, these people appear to be completely immune to Short-term-itis.
Quite simply, they know their individual investment areas very well and they keep their eyes firmly fixed on the horizon. They don’t have cash flow problems. Their assets spit off cash. When market downturns hit, they simply keep investing.
The idea of selling assets on news of a trade war would just make them laugh. Bad market news? Recessions? Those are merely good opportunities to invest.
The siren call to make portfolio changes isn’t one that’s sung every day. Some days the market is up and you toss your feet up, confident in the returns of your portfolio. Maybe you even daydream about what that newfound wealth will buy.
Those are good days. We all think we’re good long term investors when times are good.
But bad days will happen too. Certain segments of the market might be in a rotten mood. U.S. stocks might be down due to”trade war” fears. Unemployment might be up. A recession could be coming. Interest rates are rising and bonds are falling. Technology stocks are tanking. Etc, etc.
All of it is going to make you worry. Those are the bad days.
I’ll admit it’s not easy to insulate yourself from fear when those bad days happen. Seeing your stocks tank feels horrible. It’s gut wrenching. It can feel like every signal in the world is telling you to make a change.
Stay the course. Don’t focus on today. Keep compounding. Tomorrow is going to be a brighter day.
29 thoughts on “The Investor Disease”
“Everyone’s a genius in a bull market,” right? Patience really is a virtue when it comes to investing. I love the Warren Buffet Net Worth graphic that’s been making the rounds. It’s flat out astounding how much his net worth has grown at the tail end of his life. Stay the course, stay the course. Easier said than done. But future Laurie is almost always so grateful for Present/Past Laurie’s sacrifices.
Yep, a lifetime of constant compounding can sure do some amazing things! 🙂
The path to financial independence is a “long game”. In every long game it’s detrimental to react too much to frequent ups and downs.
There are lots of doctors in the FIRE community, perhaps one of them can come up with a magic pill for Short-term-itis 😉
I used to get caught up in checking personal capital daily, actually multiple times a day, just to see how much my investments had gone up. It is so counterproductive, and can cause unnecessary anxiety.
Just invest for the long haul, and let the market take care of the rest. Daily market moves won’t make or break you…panicking and selling in a down market will. Cheers!
Yep, your right half-life. If you’re truly in it for the long game it doesn’t matter what your investments do during in all the intervening days — it only matters where they are in the end-game.
How can we have patience in a world that wants an Instagram perfect life?!
Well said Mr. Tako, it’s excellent to have this point driven home!
I agree, it’s getting harder and harder to think long term. It’s a society based upon instantaneous communication an immediate feedback. Training yourself NOT to react to that society can be challenging.
Being a relative new investor (~ 5 years), I have my share moments of Short-term-itis as well. I know from experience I don’t do well with individual stock, so I stick to index funds. But even within index funds, there are options to pick and choose different sectors, I used to think if I pick certain sector, my portfolio could perform better than s&p 500. of course, I was wrong, and I have learned my lesson well. It took me a while to find an asset allocation that is comfortable for me, and I’m glad to say that I have been a “boring” investor since then, just adding proportionally to keep AA the same. My portfolio has been through two periods of market volatility (early 2016 and early this year) , and I know there are going to be more corrections and bear markets during my accumulation years, I hope (and am confident) I have the wisdom to stick to my plan through the rough years.
Yep, when investing is done well it’s incredibly boring. Just stick to your plan through all the ups and the downs and you should be fine!
It’s much easier to get caught up in market short-term-itis now than it was 10, 20, 30 etc. years a go. Information overload, especially in regard to investing often causes more harm than good. Stay long, DRIP dividends when applicable and ignore market noise.
As Warren said in a recent letter to investors: “What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period–or even to look foolish–is also essential.”
As usual, Buffett is dead right! Focusing on those fundamentals instead of what the mob thinks is the challenge. Especially in this instantaneous social-media based world! 😉
For a portion of my assets I’ve definitely got the disease. My long term assets are in real estate Crowdfunding as this asset class isn’t marked-to-market and it’s more of a cash flow vehicle.
My trading portfolio is large and I do log in daily, sometimes intemain ligged in all day if I happen to be trading (today I banked $1800. in 10 minutes in an $SPX option trade after the FED announcement). A portion of my monthly income is from selling out options and in this type of instrument, you must babysit or check on prIves frequently. I am a sophisticated investor and this strategy is one I’ve been trading for several years and will throughout my pre-retirement and during my retirement for income.
Good luck to you! I hope the ‘disease’ never ends up causing you pain.
I’m curious what you think about investing apps, such as Acorn or Stash. Because they invest spare change from everyday purchases, it seems like they would fuel short-term-itis more because your invested balance is changing every time you make a purchase. I’ve heard these apps mentioned by several bloggers/podcasters as great places for beginner investors because there is almost no barrier to entry…but beginner investors are probably even MORE likely to get short-term-itis! Thoughts?
In general gamification can be a good thing, (making saving fun and less boring) but these apps also kind of incentivize spending (which is a bad thing).
In general, I think the spending of dollars isn’t the best way to save dollars. App or no-app.
The best way to save is to *just not spend*.
Fully agree that this is one tough disease. As I have become a more seasoned investor I have gotten much more comfortable with holding a long-term, almost boring, focus. I think that some of the wisdom certainly comes with experience (and age unfortunately to match). I will be interested to see if I remain so calm when I finally FIRE some day and we are not earning a solid income to replace losses. Buying low softens the blow to your portfolio mentally.
And I LOVE the shades graphic. I need to buy those for most everyone I work with at my corporate job!
The news media is always making investing out to be something exciting, but the reality is that it should (when done right) be really boring.
Young folks are typically impatient to get rich. So telling them it’ll take over a decade of saving and compounding to get anywhere, really doesn’t go over terribly well.
I used to buy and sell stocks every now and then through my Robinhood account. But I realize it’s not a productive usage of time. At best I’m doing a little better than breaking even. I guess this qualifies for short-term-itis. But at least it’s less than 1% of my net worth that I play with 🙂
There’s nothing wrong with owning stocks, but buying and selling frequently is definitely a case short-term-itis. It’s good this is a very small percentage of your portfolio.
Checking stock prices often becomes a habit – and one that’s hard to break. I noticed that if I was at my laptop and wanted a break from work I’d check prices. Bored? Check prices. Mildly anxious about something, check prices (at least my portfolio would be doing well and I’d feel relieved about that or it would have blipped down and I’d have something new to worry abt!). Eventually I noticed my fingers dance automatically accross my keyboard typing in my brokers url, even if I was just opening a new tab. One of the best antidotes as you said is re-learning how to sit quietly in a room with your own thought. It has become almost a forgotten art in my generation!
If most investors are simply saving and investing for an eventual retirement in the future, I contend that the interim prices do not matter!
The only two prices that matter are the price when you buy and the price when you sell. Everything in between is just market noise that can be safely turned off.
I dunno. I check them all the time to take advantage of TLH. Is that short-term-itis? I’m in a high tax bracket so it seems to make sense.
Not entirely certain what you mean here. By TLH are you referring to the iShares 10-20 Year Treasury Bond ETF? It goes by the symbol of TLH.
If one of your holdings gets bid up to very high levels, higher than what you think fair value estimates would dictate, would you then sell out and redeploy that cash into another security that is priced attractively?
For my top holdings I’d keep holding but for my cyclical stocks I’m willing to let them go if the price is attractive enough and there is something else that I have my eye on. Perhaps that’s short term-itis. However the majority of my portfolio is untouched for many years. I normally get an idea about either adding or shedding a company and usually think about it for quite some time before taking action. Once I am ready to take action it’s pretty to execute when the price is right.
Not any one investing style fits most investors, myself included. I like growth investing to an extent, but also know that most of the great long-term returns are a result of buying unloved, out-of-favor or boring companies and letting the dividends Drip Drip Drip…, if applicable(excludes good high growth companies with little incentive to pay a dividend)…and Hold for a Long Time(10+ years).
In my experience I believe that most people are better off indexing and keeping it simple and cheap. Expenses are one of the few things investors can truly control. Following companies and doing R&D is fun for some, so individual stocks don’t spook them. Most people aren’t wired to have interest in following equities. I’ve met countless people, who’ll have nothing to do with individual companies based on 1 sour experience. I wish I had a dollar for every time I’ve heard, I got burned on a tip. If it takes tips to spur you to invest, you shouldn’t be doing so. That’s called gambling.
Patience is my #1 factor for long-term success, not that I don’t run out of it now and then. Patience, Patience and more Patience. The less you like instant gratification the better. Investing is comparable to planting a tree. Initially seedlings are often less than impressive. Fast forward 10 years later and you have a beautiful 25′ White Oak providing shade and biodiversity!
In addition to Short-term-itis, there’s also Bitcoin-itis, Weed-Stock-itis, and Get-rich-quick-scheme-itis.
And people wonder why they never manage to accumulate money.
Love your analogy of Short-term-itis. It applies to other things too–like sticking to a project long enough to get good at it, and living a healthy lifestyle, and developing rewarding relationships. People want fast results now but the best thing in life take repeated effort, patience, over a long period of time to see results. Short term luck-based results never last and can’t be reproduced. But hey, try telling that to the Bitcoin nut-jobs! Clearly the answer to all their money problems is bitcoin. *eye roll*
I fully admit I had short-term-itis for a bit because it took me a while to discover the virtue of index funds. I probably had my money in 3-4 other funds before I finally saw the light. The only problem is that was only about 3 years ago. If only I had known sooner I would have more money.
The headline is very catchy! Because investing in real estate is unexpected, don’t be triggered by the recent stats and keep on believing for the long term. So, the more we are focused on one project and not diverting the investment, the more return we’ll get in the long run?
The only investment that I think would not be a loss is our own business and company, our effort, because we are always capable of working harder and smarter.