Officially, a long-term investment is one that you will hold for more than one year. But a genuine long-term investment is usually held for much longer. The more conservative estimates of long-term often range between 3 and 5 years, and sometimes as far as 10 or 20 years. So for anyone hardwired to look for instant results (which is ALL of us), long-term investing presents some unique challenges.
Sex Appeal Status of Long Term Investing: None
The most important thing to remember about long-term investments is that they are not sexy. Long term investing (usually combined with value investing) is by definition boring and dull. It is more about waiting for your investment thesis to be proven than about chasing returns.
What makes this even more difficult is that even if your long-term investment strategy is a good strategy, there will be long periods of time where you look like a fool, and the people who are buying the high-flying stocks will make sure that you know you look like a fool!
This kind of pressure is inevitable with any type of investment, but it is more pronounced for long-term investors.
“Missing the party” can be very disappointing, especially when it’s a party everyone is talking about.
So how can you possibly feel good about your long-term investments when there is so much psychological pressure to get the fastest results?
Here are a few things you can try:
Studies have shown that bad news knocks us down twice as much as good news lifts us up (for further reading, this study might interest you: Stock Market Overreaction to Bad News in Good Times).
For example, if you look at your investment portfolio one day and you see that it is up for the day, it make you feel good (+1), but if you see that it is down for the day, it will make you feel twice as bad (-2). So let’s assume you look at your portfolio every day for two weeks, and it goes up for half of the days but down for the other half, and the portfolio is up at the end of two weeks.
When you add this up, you end up feeling worse overall:
5 days up times (1) = (5)
5 days down times (-2) = (-10)
Total = (-5)
Even if your portfolio is up at the end of the two weeks, looking at it every day will still make you feel worse (-5 total). However, if you only look at it once, then you will see your performance over the entire two weeks, and you will feel good (+1 total).
This example shows a very short time period, but extended to longer periods of time, the theory still holds. On average, your investments will go up on half of the days and down on the other half, and the more often you check your performance the worse it will make you feel.
So if you want to be a long-term investor and you want to feel good about your performance, the first thing you can try is to look at your stock price performance as few times as possible. You should still follow the news surrounding your investments, but try to avoid looking at the price.,
If you are taking a long-term investment, and someone else is investing with a shorter time period, then it doesn’t matter what they are doing or what they are saying about you.
Their investments might be good for the time period that they are using, but that does not mean they will do better over the long run.
This is probably the most difficult part about making long-term investments, because when you see someone else performing better than you, there is a very large temptation to abandon your boring investments and chase after the sexy stocks. So when you have this temptation, it is useful to remember the advice of the “Father of Investing,” Benjamin Graham:
“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Now, this isn’t to say that you shouldn’t consult the opinions of friends, family, and peers. This is actually an important aspect of investing.
However, if you see the crowd moving in one direction, evaluate with care why they’re flocking in such a way. Their movement may go against your investment strategy. This leads me to my next point:
Make new friends
If you are looking into making long-term investments, then the best thing you can do is find other people using the same investment time frame. Fortunately, SprinkleBit makes it very easy to search for and connect with similar investors (and it’s free). And when you find other investors who understand your investing challenges, you can use this social aspect of investing to your advantage. By discussing your investments with people who are using the same time frame, you can find comfort in the fact that you might all look foolish at the same time.
You should still keep an open mind, because this isn’t about ignoring justified criticisms to your investing approach.
It’s about knowing the difference between what works for your time period and what works for another time period.
Expanding your circle of friends can only help you.
Even with all the advice listed above, sometimes you still want to play the short-term game. And even if you choose to be a long-term investor, there is nothing wrong with feeling the need to make a few short-term trades. You can do this, but you shouldn’t make it a large part of your portfolio. In most cases, long-term investors will set aside 1% to 3% of their portfolio to be used as “play money.” This way, they will still have their core long-term portfolio, but can also have a little fun on the side. However, if you choose to do this, you will want to make sure that you keep your “play money” separated from the rest of your portfolio so you don’t mix up which investments are long-term and which ones are short-term.
Overall, this is not a guide on how to make long-term investments. That is an entirely different topic.
These are just a few simple things you can do that will make it easier for you to hold a long-term investment. Because when they say “the waiting is the hardest part,” that’s true for investing too.
Note: the information contained in or provided from or through this post is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice.
Continue the discussion!