Education | Aug 20, 2019
Thinking Long-Term in a Short-Term World
Michael J. Aroesty
In Neil Postman’s book, "Amusing Ourselves to Death", he described a world in which audiences were able to endure hours of dialogue in a single sitting. That long-ago time was during the Illinois Senatorial debates between Abraham Lincoln and Stephen Douglas in 1854, where Douglas delivered a 3-hour address, after which, Lincoln sent everyone home for dinner, before his four-hour response.
In contrast, a few weeks ago, a field of 10 Democratic Presidential hopefuls were given 30-seconds (which were often interrupted) to address the myriad of issues facing our great country.
We unequivocally live in a short-term world, and while investors know it is in their best-interest to think long-term, very few are able to do so. If I am 40, 50, or even 60 years old, should I care what happens in the stock market tomorrow, next week or next year? Probably not…but we do!
A former columnist for the Wall Street Journal, Morgan Housel, recently put investor attitude toward volatility into perspective:
“If you view every debt-fueled recession, market crash, and asset bubble as an example of your fellow people acting crazy you might get cynical, which makes it hard to be a long-term optimist even when you should be. If you view them as inevitable you realize they’re just part of the ride and an occasional reminder that the fasten-your-seatbelt sign should never be turned off”
When you feel that cynicism takes over you, do yourself a favor and Google the Inception-to-date chart of the S&P 500. It basically goes up to the right, with a few (dramatic) drops along the way. As Michael Batnick, a thoughtful investor I admire tells us, “what is crystal clear is that over time, stocks go up. But they only go up, because they’re risky, which means sometimes they go down a lot and stay there for long periods of time.”
And sometimes they go down a lot in a day, which is what happened last week. The Dow fell 3% in a day for the 307th time since 1920. Putting it that way, we should understand, that it actually happens quite a bit.
Here are a few ideas that can help you think long-term:
- You can’t think long-term, if you aren’t saving money – Having a consistent and strategic plan to save money on a monthly basis, will allow you to dollar-cost-average into stocks. Boring but true, when you are saving a consistent amount of money each month into the stock market, you will be buying more shares when prices are down, and fewer shares when prices are high. But it’s the behavior of saving, that builds good psychology when markets are volatile.
- You can’t think long-term if you experience a cash crunch – Simple and thoughtful asset allocation between cash, bonds and stocks is critical. Having cash in the bank (or even in your brokerage account) is advisable, for those surprise events that catch you off guard and in need of cash. A good rule of thumb is 6 months of fixed expenses should be liquid.
- You can’t think long-term if you take more risk than you can stomach – Avoiding big mistakes is the name of the game. If you thought about how much higher the market might be in twenty years, would you care how low it went tomorrow? In theory no, but in reality, obviously yes. And this is where planning comes into play. If you really hate seeing your accounts go down, then figure where your maximum pain point is and work backward.
If these seem obvious to you, good…it’s nothing you haven’t heard before.
Thinking long-term is hard, but that’s why it can be so rewarding. The most successful investors are able to ignore the things today that they know won’t matter tomorrow.
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Michael J. Aroesty