We are only one month into the New Year, but one in three of us who made New Year’s resolutions have likely already abandoned them. Which left me wondering: why are we so fast to give up on what we want? And with 34% of us making money related resolutions, can we really afford to call it quits? Certainly the market gyrations we’ve seen since last summer have played into my thought process. Very few people are likely to find reviewing their January brokerage statements to be a goal affirming process.
Crash and Burn
A friend of mine recently shared a conversation he had with his personal trainer. The trainer was lamenting that his typical client buys a package of ten sessions but then wants to use them back-to-back to drop weight rapidly over a two week time period.
Now, we all know to really become healthy and fit you would need to change your lifestyle, build new habits, and give your body a chance to adjust and respond. But many of his clients were crash-exercising in advance of an upcoming reunion or wedding, and then were disappointed and discouraged when they didn’t see immediate results.
My friend shared this anecdote with me because he thought it might translate: “You probably see this in investing, too, don’t you? People want to make money just as fast.”
Too often we give up on goals because we don’t see immediate results. Now, I would argue that investing isn’t as extreme as crash dieting. But it did get me thinking about all the ways investors are encouraged to focus on short-term results, and how that might impact their ability to achieve their goals.
Much more qualified people have written on our evolution towards an instant gratification society, but safe to say we are used to having answers only a Google search away. The financial industry has capitalized on the arrival of the information age, with electronic trading platforms allowing individuals to trade investments across markets that used to be reserved for the pros.
While on the surface this looks like democratization, the economics can be a bit more insidious. Many of these brokerage platforms are incentivized to get you to trade as much as possible, to convince you that you need to continually take action in response to new information, in short, to focus myopically on the short-term.
And the data suggests that, on average, we are. The New York Stock Exchange reported turnover rates for 2015 that imply investors were, on average, holding positions traded on that exchange for just over 18 months. This is much improved from the 9 months or so we were averaging during the 2008-2009 crisis days, but it’s still a far cry from the more than five year average seen in 1970.
Short-term Gains and Long-Term Pains
High turnover is particularly problematic because studies continue to show that those who trade the most often earn the least. And it makes sense. Typically the more you move stuff around, the more you incur trading costs, pay taxes, and risk missing out on a bull market run because you were under-invested or concentrated in the wrong things. A short-term focus can also encourage us to make high-risk, high-return bets that we believe are more likely to have a short-term payoff. This leads us to buy the “hot” stocks our neighbors doubled their money owning, right when they get realllllly expensive and are poised for a correction.
Don’t Just Do Something, Stand There
Environments like we have been in recently, where stock markets seem to be moving quickly and dramatically, can make it even harder to stay put. Those who have started investing only recently may be particularly discouraged to see themselves getting even farther from their goals than when they started.
I would argue that every investment strategy should have trading rules: you want to rebalance to manage risk and to adjust to changes in life circumstances. But you don’t want to become so narrowly focused on making money or beating the market today, tomorrow, this quarter, or even this year. History has shown that while the stock market offers attractive returns over the long-run, it is far from egalitarian in how it pays them out over any short-term period.
Take a lesson from the paltry 8% who are estimated to achieve their New Year’s resolutions this year and free yourself from the demands of immediate results. As an individual investor with a prudent investment plan, time and patience may in fact be your greatest edge in investing. They call it “time arbitrage” and in short, it means that you have a longer time horizon than many of the investment managers out there trying to boost their performance via short-term trades. So you can stick it out in down periods, buy assets that have fallen in price, and wait for your payoff to come. And in so doing, create real wealth, rather than just the possibility of paper gains.