Investors are not likely to be successful if they view their portfolio as something that needs to perform every day.
This age of instant gratification and constant information has trained us to focus on the wrong calendar. Instead of worrying about this month, quarter or year, we should be looking at different phases of the life cycle and invest based on our own time clock.
One of my favorite authors, Dr. Ken Dychtwald states that our life span used to be linear. We went to school, got a job for life, lived in the same house for at least 30 years, retired with a pension and died of old age. Now we have different phases of life. We may go to back to school several times, change jobs and houses on average five times or more, and ... there will be no pension.
We may also have phases of high expenses such as college or relocation, elder care or raising more than one generation. Our life currently moves in cycles rather than a straight path. Our investments should reflect this.
It is contrary that the longer we live and the more dynamic our life patterns are, the shorter-term our investments become. Ideally, it makes more sense to invest one pool of money — such as an IRA or 401k — for 30 or 40 years.
Therefore, it does not matter what the account balance is today or tomorrow, in fact you might consider choosing investments more for an inflation hedge, than current return. Otherwise you could find yourself halfway through retirement with no cost of living clause in your income.
Based on Ned Davis Research, the average holding period of stocks has decreased from 20 years from 1939 through 1970 down to just 1.67 years in 2012. This can be based in part on the fact that until the 1970s, the typical investor was a wealthy family passing down holdings from one generation to the next. Today, the largest share of investment activity is driven by retail investors.
Historically, the focus was on fundamentals and long-term growth. Today, the focus is on today's news or economic report. The media is partly to blame as they are paid to get your attention. This works best through hype and making insignificant information sound exciting. The average investor does not know what commentary is relevant and what is general noise since the announcers do such a good job of reporting with enthusiasm.
Better use of technology also has a role in the short-term focus. A vast amount of timely information is available in every medium at no cost. You don't have to listen to Granddad explain about the Great Depression and what price he bought the blue chip stock you now own, you can find anything you need on your phone in an instant.
This constant stream of data causes us to think we could bypass losses by understanding the latest economic reports. In reality, markets work in very long cycles, rarely impacted by one quarter's earnings or jobs report. Returns compound over time, which gives the investor the best risk-adjusted returns.
Making short-term changes rarely enhances your long-term performance. It is important to have a strategy and time frame for each goal. Enlist the help of an advisor or mentor to diversify your investments and rebalance your portfolio to keep profits working for you.
We don't have to go back two generations to learn how to invest. We should take advantage of all the tools and technology we have today, but filter out the noise that causes us to focus on the day or month instead of our life goals.
Patricia Kummer has been an independent Certified Financial Planner for 27 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.