Why Short-Term Investment Returns are Irrelevant (2024)

Why Short-Term Investment Returns are Irrelevant

It is human tendency to want instant gratification for everything we do. For instance, I keep doing like 3-day diets and can’t seem to make any real traction on losing weight. How many of you can sympathize with me on that one? Additionally, if you were to speak to any credible health expert, they would tell you a healthy diet is a life style diet. One in which you can maintain forever rather than lose a ton of weight in a short period of time. Those quick weight loss diets usually end up with us gaining the weight back slowly overtime, although they can be useful for that wedding next month.

I make these types of analogies as I find it helps us relate to the investment world. All too often we obsess over what happened with our investments over the past few months or weeks. The reality is virtually nothing can be gleamed from viewing an investment, of any type, over a real short-term period. I see this type of financial behavior really show itself during rather quick market movements, like last year.

People often times during these quick market movements really show a bit of recency bias. They’ll put way too much weighting on what happened last year in the markets rather than the previous 10 years or so of investing. In some regards I totally get it, but on the other hand, there is a big part of me that realizes I have to spend a lot of time educating individuals how little you can infer from a short term market perspective.

The logic

No investment, and no investor, and no strategy works equally in all environments. From the Warren Buffets of the world, down to the Diversified, LLC’s of the world, investment professionals have to choose a philosophy and investment strategy. This is usually done by understanding and studying all markets along with market theory. From there all investment professionals create a manifesto that they rely on to guide their investment decisions. What I have found in my 20 plus years in the investment and financial advice field, is that investments work and investors don’t. Meaning, if we let our investment strategies play out over full market cycles, they generally have a good story and returns.

It is when we give up on an investment philosophy too soon that we find ourselves constantly chasing that pot at the end of the rainbow. Think through Warren Buffett’s famous quote when asked how long is his ideal time frame to hold a stock? His answer, “forever.” The more telling thing is why that is his answer. Don’t stocks go in and out of favor? Shouldn’t the greatest investor that has ever walked the earth be diving in and out of stocks like crazy, perfectly timing them like he is orchestrating his finest opus?

The reality is no. If a company is built correctly, it should always be on an upward trajectory. That doesn’t mean it is a straight upward trajectory, however. The best companies on the planet have bad periods, or market conditions that are less favorable to them or their industry. Does that mean one should abandon these companies? Generally, no, or at least if you ask the greatest who has ever done it. Same holds true for an entire portfolio.

If your portfolio is properly diversified, you’ll always have stuff that outperform and under-perform. You’ll always have periods where your blend or mix of stocks and bonds does better than others. The key isn’t in finding when these periods happen, but rather staying resolute in your decision and beliefs that this strategy will get your financial goals accomplished.

For instance, buying a stock that is down 20% ytd and falls another 10% doesn’t make it a bad purchase. Perhaps under a myopic view it may look like you bought a terrible stock. But what if you bought it because it was a great value purchase and instead of trying to do the impossible and time its bottom you simply bought it at a 20% not 30% discount. Present day it may feel bad, but if in 3 years the stock triples, then aren’t you glad you bought it at that discount? Patience, trust, and faith may be needed to get you there, but that is why gleaming anything from short periods of time is truthfully worthless.

In summary

Don’t give up on a diet or investment philosophy, that you know will work after a short period of time. With both, and many facets of life, it is the long game that matters. That is what will get you to your ideal physical and financial returns you are seeking.

Stay wealthy, healthy, and happy.