Stop worrying about short term performance

Stop worrying about short term performance

 

As a financial advisor I see the financials of people from all walks of life. I see some people who have had amazing financial success. I also see people who are on the verge of bankruptcy.

 

There are always striking similarities between the various different people we work with. The one I want to write about today, is how often people focus on their short term investment performance, rather than focusing on the long term.

 

Short and long term investing

 

As I write this, we are a week away from a U.S presidential election. By all accounts it will drastically shift the way the world works depending on its results. Nearly every conversation or phone call I have with clients is them wanting to know how their investments will perform over the next 2 weeks to 6 months.

The best part? I simply don’t know. The ability of any investment professional to predict the short term nature of the markets is bad in the best of times. We can always get lucky, but the reality is very few if anyone has the ability to predict how the market will perform in the short term.

 

market professional confused

 

The reason is that in the short term, markets behave very irrationally and are completely unpredictable. The longer the time frame however, the more predictable the markets become.

 

Lets review the S&P 500 stock returns since 1950, looking at how the market performed in any given year, 3 year period, 5 year period, 10 year period, and 20 year period. These are calendar year returns, and not rolling returns. Included are the maximum returns, minimum returns, and average returns varied over each timeline.

 

stock market return variance over time

 

It is clear from the data that the range of expectations in any given year is over 89%. However, over a 20 year period the range drops considerably down to 12.26%. Meaning that the longer the time horizon, the more predictable and less volatile returns become.

 

If your investing seriously, you should only be investing in the stock market for long term goals. If you continue to allow the short term nature of the market impact your decision making, you are investing wrong. Figure out the time horizon of your goal, and invest it accordingly. Don’t micromanage the investments by focusing on what is happening day to day, week to week, or month to month.

 

don't panic with investment performance

 

The more you can focus on the long term, the more successful an investor you will become.