Observing how people make investment decisions has been part of my life since 1975. Over that time the “gospel” of long term investing has been preached consistently, yet just like the messages in other preachings, many go their own way with suboptimal or disastrous results. In his post entitled“Investors Behaving Badly” colleague Russ Thornton shares the results of the most recent Dalbar study of “investor” results and how that differs from “investment results”; a difference of over 6% PER YEAR over 20 years. During this time the study points out the average holding period is 3 years. It’s important to keep in mind, that the average is just that, the average. What this means to me is, for every investor that held for 20 years, there must be a whole lot of folks that are into short term trading and bring the average to what it is.
Just like a sailor needs to adjust the sails for a change in the wind, being a long-term investor does not mean that you shouldn’t ever adjust your portfolio to align it with your current objectives, or get rid of an obviously poor performer. Yet, if you need to change everything frequently there may be an issue with your investment selection methodology.
The other issue is fear. I’m reminded of a piece we put on the blog about a year ago entitled “Scary Times”. There is no question that the emotion of fear will often cause people to make decisions that don’t have favorable results. It seems like having a long- term strategy is so easy to do. Why doesn’t everyone adhere to it? As business philosopher, writer and speakerJim Rohn often quipped “The reason that people don’t do the easy things they can do to make them successful is because it is also easy not to”. It is easy to sit in cash on the sidelines, easy to move the money to something else that looks better “today” and a whole host of other emotional reasons that will offer temporary comfort OR exhilaration. Successful investing is not a game, but a process that if followed carefully and diligently leads to a high probability of success. Objective advice and guidance can often make the difference.