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.