I was recently asked by a friend for my opinion on UK assets following the renewed weakness in sterling and the general Brexit induced pessimism surrounding the UK economy. I am deeply reticent to talk about this type of investment related issue outside of work; primarily because it usually ends up with the person wondering if I really have a job in the investment industry – I don’t know where markets are headed, I don’t have any good stock tips and have no unequivocal opinions on key economic issues.
Although it is inevitably a conversation killer, I instead try to turn to sensible and broad investment principles; on this occasion I said something along the lines of: “It depends on your time horizon, if you are investing for the long-term – like your pension – then buying unloved and undervalued assets can be a good idea, but if you are looking for a short-term trade the risk and uncertainty is extremely high”. Whilst I think the general point here is sound*, on reflection I made a major behavioural omission, which I think is fairly common when thinking about time horizons.
When we talk about investment time horizons we often focus on only two discrete points – when we invest and when we plan to disinvest. If I make an investment in my pension today, which I hope to draw upon in 30 years’ time; my time horizon is clear**. Whilst this is an incredibly important element of any investment decision, our tendency is to focus on the start and the end, and neglect what we might do in the intervening period.
What I should have said in response to my friend’s question on the UK is: “it depends on your time horizon…and even if you have a long-term objective, are you going to be checking the valuation and poring over the news every day? If so, then your time horizon might be a great deal shorter than you think”.
Even if our circumstances do not change, our behaviour can lead to our realised time horizon for any given investment being materially different to what we may have stated at the outset. The overwhelming driver of this is how we engage with financial markets – how frequently are we checking our portfolio? How easily can we trade? How anxious do daily price fluctuations make us? Are we eagerly watching the financial news? Are we checking on short-term performance?
Making a long-term investment is not simply investing money with the aim of meeting a temporally distant goal; but understanding the behavioural discipline required to be a long-term investor. Where possible the ‘easiest’ route is simply to disengage from the daily cacophony of market and economic news, and commit to a long-term investment plan. For many^ this is not feasible and in the constant battle between long-term objectives and short-term behavioural pressures there is typically only one winner. Unfortunately, for most of us, this means that investing for the long-term is simply making a succession of short-term decisions.
* I am making the very simple point that valuation matters to long-term expected returns.
** Of course, circumstances may dictate a change in your time horizon.
^ This is a particular problem for professional investors.