The problem with short term expectations

Connie Mckeage,  Managing Director

For those of us who have been around the markets for a number of years, the short-term ups and downs and roundabouts of the sharemarket come as no surprise.

It has been a tough week for advisers and their clients, as no matter how much time is spent educating clients up-front, the one thing we can all count on is that when the market shifts dramatically downward as it has this week, a sub-set of clients will panic. And even more pressure is placed on the shoulders of the trusted adviser. 

It’s a good time to reflect on Nassim Taleb’s quote: “When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.”

And wouldn’t it be easy to conclude that nothing has really changed, we’ve seen it all before and we will see it all again. Yet that little voice inside keeps wondering whether this is really the case - or whether it has actually changed forever for us and our clients.   

Let me share some facts with you:

  • In 1976 in the US, the average company held a stock for 5.1 years. By 2015, it had moved to 7.3 months. Across the world it moved from 3.9 years to 7.4 months and it has continued to decrease.

  • Some 70 per cent of shares in listed companies today are held by intermediaries, including managed funds, industry funds, insurance companies and other institutional investors who manage them on behalf of beneficiaries.

The fund managers in particular are increasingly being judged and rewarded based on quarterly performance tables. The alpha managers making longer-term portfolio decisions are coming under constant short-term scrutiny. 

As an adviser, you spend so much of your time up-front educating clients on what they need to do to achieve their longer-term financial goals, and stay focused on the end game.

But how do we do that when we now live in a world enamoured with short-term performance, where we have an unprecedented level of turnover in shares.   

Your clients read the papers, they listen to the news, they hear the drama. You and you alone often stand between them and knee-jerk reactions to these short-term pressures. Yet there is an even greater challenge for us all.  How do we make good longer-term decisions in the land of immediate gratification? 

Maybe it’s time for industry funds, and other mainstay institutions to step back, rid ourselves of those quarterly performance charts and allow fund managers to do their jobs – creating wealth for the end investor over a realistic timeframe.

At least the Jeff Bezoses of the world will continue to think longer-term despite the short-term pressure. In his 1997 letter to shareholders he issued a manifesto called It’s all about the long-term, where he laid out his approach to business and running Amazon.  This manifesto has been included in every shareholder letter since.

It’s about time common sense came back into the market, otherwise reconciling short term investing with longer term goals will just never add up.

 


The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice Education Pty Ltd or its related entities. All content is intended for a professional financial adviser audience only and does not constitute financial advice. To view our full terms and conditions, click here.

 

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