Illustration: Gerd Altman. Source: Pixabay
Everybody says they are. When the market is high, they claim that they’re not worried about a few small fluctuations. But if stocks fall 5%, you’d think we just declared war. They everyone wants to get out, but only until the market heads back up. Then they’re long-term investors again.
We don’t think about what we own, we only think about what we’ve gained or lost. For example, when folks get a quarterly investment statement, they don’t look at their total wealth. They look at how it has gone up or down. And we worry more about the downside than we’re excited about the upside. Psychologically, it hurts more to lose something than it feels good to win. That’s why the status quo tends to be more popular: change always implies that something could go wrong – something that’s working right now.
Risk aversion. Source: Wikipedia
This gives truly long-term investors an edge. If we can look past the squiggles and jiggles, we can invest with broader financial and economic trends in mind. For example, right now the “earnings yield” of the broad market is about 5½ %. That’s the earnings of an average company divided by its market capitalization. And firms can still borrow money at 3½ %. It makes financial sense in this environment for corporate treasurers to issue bonds to buy back shares of their companies. And that’s exactly what’s been happening for the past seven years.
The rewards of long-term thinking are better returns and the peace of mind that comes from being on-track to reach your financial goals. But don’t be too long term. After all, as John Maynard Keynes once said, in the very long run, we’re all dead.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”