An ostrich doesn’t actually bury her head in the sand out of fear. While you might see her head disappear into a hole, the mother ostrich is simply turning her eggs every once in a while. In other words, she’s not ignoring a problem, she’s tending to business.
Long-term investing is not about ignoring anything at all. Instead, it focuses on nurturing growth by sticking to a plan that history says, over time, tends to work as expected. If there is any avoidance involved in long-term investment, it’s a positive: refusing to get drawn into the volatility game.
It takes patience and confidence to grow wealth using a long-term approach. Historically, though, this strategy beats the overall market by a modest amount. Patience makes it possible to wait years before realizing the paper gains that have, hopefully, been building gradually for the bulk of the time. Confidence provides the strength to continue believing in the long-term strategy even when certain holdings in your portfolio make the news with a big run that you won’t cash in on—today.
To use a baseball analogy, short-term investors tend to swing for the fences. If you happen to be Babe Ruth, that strategy will put you in the record books. Then again, Ruth struck out more times than he hit home runs, every year—four times as many in his last year in the majors. And, again, that was THE Babe Ruth. A long-term investor is happy to hit lots of singles, a few doubles, and some home runs when the right pitches come their way. But they’re patient, and patience pays off in the long run.
Despite the addition of technology, day trading, automated trading, and greater effects from global market activity, volatility hasn’t risen as dramatically as it might seem over the past decades. One study1 looked at measures of monthly and daily volatility over a seventy-year span, from 1940 to 2014. Monthly volatility rose from just under four percent to just over four percent, while daily volatility increased from below 0.5 percent to above 1 percent. That being said, it’s not just market volatility, but also the volatility of individual stocks, that tends to affect the portfolios of short-term investors very differently than that of long-term investors. Also, that study only went until 2014. The perception recently is probably that volatility is on the rise.
Short-term trading in stocks with a high beta, indicating substantial volatility, drives an increased need to track the stock, with ongoing attempts to time the market. So, maybe it’s not always obvious, but a short-term strategy with its inherent exposure to volatility can bring with it quite a high demand for time and attention. From researching which stocks to consider—to buying, tracking, selling, and accounting for frequent trading—the time can really add up. And this is a fact of life for short-term investors whether they use brokers or make the trades themselves.
Short-term investing loves attention, too, and it will grab as much of an investor’s attention as it can. Following stocks to try to make short-term trading decisions is a distraction long-term investors are usually happy to live without.
In fact, one of the biggest benefits of sticking to a long-term investment strategy is the freedom to ignore the daily barrage of bearish and bullish chatter. Whether the message is coming from TV pundits, social media, or anywhere else, the underlying reaction is the same: do something! Trade something. Short something else. Churn, churn, churn.
Attempts at timing the market with trades generally cause a frequent scratching at the itch to buy and sell. This habit of buying and selling tends to incur fees that eat into profits, from brokerage fees to loads on mutual funds. Despite today’s lower stock commissions, these fees can add up over the long run.
The tax implications can be more significant for short-term investors as well. Gains from short-term investments are taxed at the investor’s federal income tax rate, versus the lower rate for long-term capital gains.
The other cost of churning stocks is the opportunity cost. If someone holds a stock for a relatively short amount of time, the opportunity to capture gains from that same stock are missed for all the other time periods when the investor has no position in it. This may appear to reduce the risk of losses, but in the long run the investor will likely miss out on the overall gains from longer-term holding.
While nobody can promise that a long-term investment strategy will lead to getting more sleep and living longer, it does tend to offer greater peace of mind than the more volatile alternative. By discussing your objectives with a financial advisor, you’ll have a better idea of how a long-term investing strategy might fit into your future.
1“Has Stock Market Volatility Increased? Yes and No!”, Buckingham Strategic Wealth, 2016, https://buckinghamadvisor.com/has-stock-market-volatility-increased-yes-and-no/
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