Why the short term matters

Life is littered with overused sayings and phrases that come out as a default response 99% of the time. For example, I played some form of competitive contact sport from 10 to a (hard fought) retirement at 35. After a couple of surgeries, I was politely told by friends and family that it was time to give up the ghost – this was normally communicated with all the usual adages and idioms: “father time is undefeated”, “Need to listen to your body” etc.

My reaction to these sayings, despite being well intentioned, was normally annoyance. It wasn’t personal to me and didn’t take into account that at least in my mind I was still 21 and indestructible – despite all contrary evidence.

Time has given me hindsight and as the saying goes “hindsight is 20/20”, and I can see that it was the right decision and the advice was correct – didn’t stop me from being annoyed at the time. Which then got me to think about what is the financial planner’s overused phrase and after 2022 it is definitely “over the long-term…”.

I don’t think I have had a meeting over the last 18 months where I have not used this phrase at some point or in some context. Now in the same way, that all those phrases given to me about stopping banging my skull every weekend were well-intentioned and right so is “over the long-term”. It reflects that investing is a long-term endeavour and flags how unpredictable investment markets are in the short-term – but it is not personal and doesn’t reflect that if the value of your investments has gone down you have very personal concerns around this.

So I want to apologise for the (well-intentioned) overuse of that phrase and confirm that the short-term definitely matters! It matters for any number of reasons but I wanted to flag a couple of the main reasons that are crucial in the short-term:

1. If you react you miss the recovery

If your investments are down and you react – selling down to cash or follow far more dangerous adages as “flight to Gold”. You miss the eventual recovery.

Seven of the best ten days that the S&P 500 have had over the last twenty years have occurred within two weeks of the ten worst days. If you react to short-term downturns, then you can miss out on the short-term recoveries – miss out on these and any long-term projections go out the window.

Your short-term behaviour really matters in not missing out on returns both short-term and long-term.

2. Down markets are short-lived

Bear & Bull Markets are a type of jargon in and of themselves. However, in simple terms when markets are down (Bear years) this tends to last far less than the good years (Bull years).

Since 1945, the average Bull Market lasts 6 years and the average Bear Market lasts 14 months. So, when the markets are down and your well-intentioned financial planner is discussing long-term annualised returns, the same data shows that recovery from these downturns are months not the decades we use when talking about annualised returns.

3. Short-term pattern of returns

A quote attributed to Mark Twain goes “history doesn’t repeat itself, but it often rhymes” and investing is exactly the same. The exact pattern of returns never repeats itself but there are similar looking events that frequently crop up. One very short-term pattern is good years quickly follow bad years and by reacting you miss out on these good years.

Take for example the single worst calendar year in the UK stock market in 1974 where the UK stock market fell by 50.4% - this was followed by the best calendar year the UK stock market has ever recorded in 1975 with a +145.2% positive return.

This happens time and again when looking at returns:

1990: -10.2% 1991: +19.9%

2002: -22.4% 2003: +20.9%

2008: -30.5% 2009: +20.9%

Therefore, if you feel you don’t have decades to capture the annualised return, at least wait out the projected months for the good year that so often follows the bad year.

So the short-term really matters. Short-term behaviour determines the outcome of any investments and strategy, so why have I, and others, found ourselves rolling out the “Over the long-term…” phrase in every meeting? Simply because the short-term is unpredictable and nobody knows when these patterns and recoveries will take place.

2022 was a largely negative year for investment portfolios, 2023 has started positively but that in no way is a prediction for the remaining months or the next couple of years. So, we fall back on the long-term phrases and idioms that provide more certainty than short-term predictions.

However, even if you feel you don’t have decades to wait just know that decisions taken over days and months can have a massive detrimental impact to your short-term outcomes as well.

Just like when I consider a ‘glorious’ comeback to contact sports, I need reminded that “father time is undefeated” as a long-term reminder that I’m not 21 and indestructible anymore and even a short-term return could result in another injury, that has both short-term and long-term consequences.

To discuss any of themes of this blog in more detail please reach out to jonathan.young@carbonfinancial...

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