Why don't we listen to Rudyard?
If you can meet with Triumph and Disaster And treat those two impostors just the same - Rudyard Kipling
Can we provide some structure to our unpredictable landscape? The foundation for any investment proposal must be the investor time-horizon. How can we plot the course without first determining our arrival time? Time horizon is specific to each investor. Specificity is natural in dynamic unpredictable markets. A range of factors can determine the duration of each investment including investor experience, risk appetite, existing resources, behavioural biases and plain old personality traits. A day-trader leaps in and out of trades based usually on technical indicators, volume, momentum and market sentiment. Event-driven traders seek to capture sizeable market moves based on a belief that mispricing exists and a market event [such as a merger, earnings announcement or senior management appointment] will act as a catalyst and drive the market one way or the other. A long-term investor will make strategic decisions on asset allocation most probably based on secular beliefs on market conditions and their future trajectory. Longer-term investors require a plan and discipline. Once we have determined what type of trader we are, we next need to write down our goals. Are we looking to compound our wealth over decades or leverage short-term returns through a narrow day-trading strategy? Perhaps we are combining the two. Are we investing for income or capital accumulation?
Sigma σ
The factor that adequately distinguishes each of these distinct time horizons is volatility. Longer-term investors are less concerned about volatility because they have the benefit of time to navigate through periods of choppy water. In fact, volatility over longer periods actually offers greater buying opportunities as assets become cheaper to longer-term buyers. Think about it carefully. What does volatility do? It creates panic amongst irrational market participants and sellers emerge driving down the price of the asset. Longer-term investors that are buying regularly through say a pension plan then purchase these assets at a discount. Remember. They are only at a discount though if prices recover. And what do you need for prices to recover? Correct – time! Something a longer-term investor has plenty of.
Trends
Like markets, trends are often complex in nature. There are many different types of market trends including the business cycle, secular [longer-term] trends relating to debt and demographics and more cyclical [shorter term] trends. Why is this important? Well we need to identify whether our investment strategy is linked to any of these trends or all of them. By now you should have realised that time horizon is not as simple as it may initially appear. We need to distinguish between longer-term structural market shifts and dynamic sentiment based market trends determined by investor fear and greed. This is where perhaps the greatest trait toward investor success is required: market discipline! If we have the discipline to stick to our “longer term” goals then we are less concerned about shorter-term gyrations in the market. Let us dispel the myths around rear-view asset allocation selection. The Monday morning quarterback will always point to a $1 invested in 2001 and the amount accumulated 20 years later. Perhaps Bond bulls will point to the entry in US 10 year bonds in 1982. The crucial phrase to watch out for is “if you had held onto your position” you would have made blah blah blah… The bottom line here is that excessive volatility makes cowards of us all and it is easy in hindsight to play the Monday morning QB. What keeps you invested is your time horizon!
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