Short-term Thinking vs. Long-term Investing

The technical term for short-sightedness, “myopia,” literally means to shut one’s eyes. Prescription glasses or contacts fix actual short-sightedness. But the figurative kind of myopia, which is really referring to an inability to think and plan for the long term, can be disastrous in the world of financial planning and investing.

Hedging against market volatility has always been considered a key benefit of long-term investing. The markets’ reaction to the effects of the COVID-19 pandemic highlight both how testing it can be to maintain positions and, at the same time, how short-term decisions could force investors to miss bounce backs if they sell based on reactions alone.

So, with the current situation fully in mind, here are a few thoughts on the pitfalls of short-term thinking—and advantages of long-term investing—when trying to build and maintain wealth.

Long-term Discipline vs. Instant Gratification

Social pressures often steer people to buy big-ticket items, put on large events, or go on expensive trips. One term for this is “instant gratification.” This is fantastic for certain businesses that benefit from this spending and, on a grander scale, for supporting growth in the world’s economies. It does, however, work counter to the goal of working toward long-term savings and hitting investment targets. Not only does this reduce the amount saved, it likely cuts down on what could otherwise be very smart, longer-term investments. When the world eventually returns to the “new normal,” it would be good to still have this in mind.

Just as portfolios require rebalancing, the tug between short-term spending and long-term investing should be revisited on a regular basis and especially before making significant financial decisions. Whether you do this on your own or with the guidance of a professional, what’s important is that you commit to understanding the need to create balance and the impact the choice could make on long-term plans. When working with an advisor, you should expect observations and information, but not judgment.

Perhaps one way to work toward moving the balance more toward long-term discipline might we to choose a different term for it. How about “long-term gratification?”

Financial Goals vs. Vacation Goals

Vacation goals—even those that have been put on hold for now—are “nice to haves,” and hard work requires the occasional vacation for long-term well-being. But vacation goals should be weighed carefully, as they might come at the expense of meeting longer-term financial goals such as saving for retirement. The happy memories of that eventual European vacation could fade quickly if, years later, you’re forced to delay retirement because of those first-class tickets and premium restaurants. As always, it is a personal choice that has long-term financial implications.

A long-term investing strategy should go a long way toward creating the ability to afford those much-needed vacations. Even better, the ability to be comfortable with one’s long-term portfolio can also contribute to a more relaxed vacation, one where forgetting about the markets for a few days is entirely possible.

Institutional Investors: Pressure to Think Short-Term

Institutional investors count for a significant portion of total market investment dollars, especially when it comes to large-cap companies. While this adds liquidity on the broader scale, it can add volatility to individual stocks. One reason for this is that hedge fund managers, for example, are expected to deliver positive results every quarter, which leads to higher churn and shorter-term positions. This represents the type of short-term thinking that individual investors can’t control, but it still affects their portfolios.

Long-term investing offers at least some avoidance of exposure to this impact from the short-term thinking of institutional investors. It does this by not overreacting to short-term price swings, taking the longer view.

Good governance and long-term vision

Long-term investing requires a certain level of nerve control in order to avoid panic during sudden downturns and steer clear of over-investment during positive climbs. This is familiar territory these days. But, one way to bolster one’s self-control is to ensure that positions are held, as much as possible, in companies with good financial governance.

Corporate governance style and philosophy should serve as a reasonable barometer of a company’s long-term vs. short-term thinking. Of course, executives need to meet shareholder expectations every quarter. How they do that, though—whether through demonstrable, ongoing business success or clever reporting techniques—will deliver the signals investors need in order to commit to long-term investments for their portfolios.

The Takeaway

As you can tell, we’re not big fans of short-term thinking. In fact, it can lead to long-term trouble is many more ways than we’ve touched on here. We believe that the advantages of long-term investing far outweigh the temporary tradeoffs and, frankly, dangers, of short-term thinking. In the battle between short-term thinking and long-term investing—even in today’s world—you know who we’re cheering for.

Disclosure:

This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor or Attorney on your specific situation.  The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, Association.  All efforts have been made to report or share true and accurate information.  However, J.L. Bainbridge & Company, Inc., is unable to verify the content and the content is subject to change and become materially inaccurate without notice.  For additional information about J.L. Bainbridge & Company, Inc., (CRD # 108058) please visit the SEC Website at www.adviserinfo.sec.gov.  For a copy of the firms ADV Part 2 Brochure, please contact us at 941-365-3435.  While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Although we monitor comments left on this page, we do not endorse or necessarily share the same opinions expressed by site users.  Please honor our request to limit your posts to industry-related educational information and comments.

JNJ Dividend increase sources from JNJ Investor Fact Sheet
EPS Growth – Earnings Per Share Growth – A company’s profit divided by its number of common outstanding shares.Source: Nasdaq
It should neither be assumed that future results will be as profitable or that a loss could not be incurred.