SENSIBLE DOLLARS

Short-termism is like taking your cake out too soon

By Allan Kunigis

Allan Kunigis is a Canadian-born freelance financial writer based in Shelburne, Vermont. He has written about personal finance for more than two decades. He is the author of A Kid’s Activity Book on Money and Finance: Teach Children About Saving, Borrowing, and Planning for the Future, published in September.

If you were planning a trip across the country, would you:

A: Walk?

B: Ride your bicycle?

C: Or drive your car?

A silly question for sure. Unless this is your epic panCanadian quest à la Terry Fox, I’m guessing you’ll drive.

Bear with me for one more obvious question. If you were planning to go to your next-door neighbour’s house to borrow a garden tool, would you:

A: Walk?

B: Take your bike out of the garage and inflate the tires, put on your helmet, etc. and ride over?

C: Or would you drive? Assuming your neighbour doesn’t live a kilometre or more down the road, I’m guessing you’ll walk across the lawn.

ODD QUESTIONS

Why am I asking these odd questions? To try and illustrate, in a fresh way, something I’ve written and read about too many times to count: Invest appropriately for your time horizon (the length of time you expect to remain invested).

Time-appropriate investing choices boil down to using less-volatile (safer) investments, such as a bank account, guaranteed investment certificate (GIC), or money market fund, for shorter-term goals (less than two or three years away). For example, saving to help your child pay for his or her wedding a year from now or saving up for a round-the-world post-Covid vacation in 2022 (let’s hope!) would involve protecting your original principal from any short-term jolts.

Conversely, long-term investments give you plenty of time to ride out any short-term stock market ups and downs. By investing in a diversified mix of stocks/ stock funds and bonds/bond funds, you could benefit from higher long-term earnings than the absurdly low current rates of return on a GIC or money market fund today.

Short-termism can be a wound too many investors inflict on themselves.

This all probably makes a lot of sense so far, I hope.

A short-term focus for a long-term goal makes no sense.

Given all of the above, what truly makes no sense to me is why so many investors who are saving for retirement or other long-term goals are so fixated on what the stock market does tomorrow, next week, or next month.

If you’re not going to touch that money for a decade or longer, how will tomorrow’s one-per-cent gain or the one-per-cent drop the following day matter in the long term?

Short-termism can be a wound too many investors inflict on themselves. It’s not just a waste of time like standing by the oven window and watching constantly to see if your cake or quiche is ready. You surely must have better things to do with your time than watch your account balance fluctuate day by day for thousands of days.

The real danger is the risk of overreacting. Rather than leaving your investments alone to grow over time, too many of us panic when we see an inevitable market downturn. Instead of riding it out, we stick our fingers in the cake while it’s still in the oven, and, yes, we get burned!

The real danger is the risk of overreacting. Rather than leaving your investments alone to grow over time, too many of us panic when we see an inevitable market downturn.

DISTRACTING NOISE

Of course, the financial media and internet make it harder for us to be patient and ignore the short-term ups and downs. They create a distracting “noise” that can be hard to ignore.

“The S&P/TSX fell 300 points yesterday… The Dow Jones Industrial Average gained 135 points today and ended at a record high.” How will that affect you and your life savings two decades from now?

What really matters is how well suited your investment mix is for your time horizon and for your degree of tolerance for risk. That shouldn’t change day by day, should it?

And if you’ve just entered or are about to enter retirement, you shouldn’t have too much exposure to stocks, but you should have some. How much? It depends on your tolerance for risk, but a popular rule of thumb is to subtract your age from a number, such as 120, to arrive at your rough stock allocation.

For example:

At age 60, 120-60 = 60% stocks, and the rest in bonds and cash

At age 70, 120-70 = 50% stocks …

At age 80, 120-80 = 40% stocks …

Following that kind of long-term strategy will gradually and steadily decrease your investment portfolio’s exposure to volatility.

FIVE WAYS TO PROTECT YOURSELF FROM SHORT-TERMISM

1. Automate. Stop thinking about the ups and downs of the market by automating your investment plan contributions. If you belong to a workplace retirement savings plan, a regular amount should be deducted at source from your paycheque. You never need to think about it or be tempted to spend it.

2. Tune out. Turn off the investment news. Every minute you’re not focused on the investment markets is that much more time you’ll have for anything else.

3. Work with a fi nancial advisor. Find a good one who has experience, credentials, and a good reputation.

Here’s a helpful article on how to fi nd the right fi nancial advisor: https://www.canada.ca/en/fi nancial-consumeragency/services/savings-investments/choosefi nancial-advisor.html

4. Monitor your investments but don’t fi xate. Monitor your investments by doing a brief quarterly review. Things to focus on are whether your mix of assets has shifted substantially over time and, towards year end, whether you might be best advised to sell any taxable investments that have lost money in order to offset capital gains elsewhere. That’s called tax-loss harvesting.

5. Do a thorough annual fi nancial review. Once a year, do a fi nancial check-up, preferably with your fi nancial planner or financial advisor. This is a thorough review of all of your personal finances.

That includes your investment mix, your portfolio’s performance versus relevant benchmarks, your progress towards major goals such as retirement, your insurance needs and coverage, and whether your estate plan is up to date and appropriate. That kind of thoughtful regular review should counter your temptation to be a market short-timer.

What Would Warren Do?

If you need a role model as an investor, look no further than the deservedly famous Warren Buffett. An extremely successful investor over the past 65 or so years, Buffett has consistently followed a disciplined long-term vision and strategy.

He espouses ignoring the market’s short-term gyrations with truisms such as: “A short focus is not conducive to long-term profi ts.” And he also intentionally remains in Omaha, Nebraska, far, far away from the hustle and bustle and overstimulation of Wall Street and New York City.

The next time you’re tempted to take your investment cake out of the oven before it’s ready or before you need to eat, ask yourself, “WWWD?” –– What would Warren do?