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Wall Street Steward Blog

"Long Term" Is A Mindset

WHEN did the investment industry become so infatuated with short term results?

That is a tough question to ask, and an even tougher one to answer. I think a combination of two things has led to our mindset change of what is “long term” versus what is “short term.”

1. Technology
2. Mainstream media

These two things have changed the investment game. They are to the investment world what Michael Jordan was to the NBA. Remember those short, tight shorts? Ewww…

Think about how your grandfather used to check stock quotes. Mine would wake up early in the morning, put on his bedroom slippers, sit down at the breakfast table to drink his coffee and check stock quotes in the NEWSPAPER. My how times have changed….today, a grandfather opens his eyes, reaches for his iPad, and checks his investment portfolio without even lifting his head off of the pillow.

Forget about the newspaper – only nostalgic people still read those.

Or, for you anti-technology people, you could just power up the television and tune to CNBC to see what the market conditions are.  A lot of people in my industry do not care for CNBC, but I see it as a very valuable tool, because it delivers information to individuals in a format that they understand.

Irritated Reader: “What do CNBC and iPads have to do with short term or long term?”

Follow me here.

When is the last time you checked the value of the home you live in? A year ago? 5 years ago? Last time you paid property tax? When you purchased it? What if you received CONSTANT updates on the value of your home. It might go like this:

knock, knock, knock, knock Man knocks on your front door, you answer.

“Mr. Kraft, I am happy to inform you that your neighborhood just built a new park and due to those improvements, your home has appreciated 3%. Now it is worth $323,500.”

Two days later the update is “Mr. Kraft, you must be living right, because due to the development of the land across the street, your home has gone up another 6% and is now worth $342,910.”

A week after that, “Bob, the house next door to you sold for an inflated price, so tack on another 2.5% to your house. It is now worth $351,483.”

About the time you really start to get excited, the man shows up one morning with a frown and a 5 o’clock shadow only to tell you “I hate to say it, but your neighbor has not mowed his lawn for 6 months. Your home has lost 3% today, and is currently worth $340,939.”

The next time he knocks: “Your other neighbor’s employer bought his house to relocate him and since they are not in the real estate business, they took a lowball offer that was $100,000 less than what it was worth. I am sorry to tell you that your home is now worth 13% less, making the current value $296,617.”

“Some lady keeps letting her dog POOP in your yard.” Down another 5%. $281,786.

Anyone growing tired of this roller coaster ride? The point is that real estate goes up and down in value, and many times these fluctuations are based on factors that are beyond the homeowner’s control…just like an drumroll investment portfolio. end drumroll

However, because we are living in our home and are not necessarily selling the house THAT INSTANT, the day to day price movements mean very little. That is why there is not a CNBC for house prices. There is no real time feed running across the bottom of the TV that shows how home values change by the second. Also, as of this writing, the technology gurus have yet to create a device to show us how our home performs day to day.

There is no technology for that. There is no dedicated TV channel. That is why we look at a house as a LONG TERM investment. We have no other choice.

Your portfolio should be no different. Do you need the money at this moment or at retirement? Is it required for you to check your account balance every single day? Of course not. BUT, people have taken the TOOLS (technology and the media) and misused them so that they check their portfolio several times a day through many different mediums.

That has created the SHORT TERM mentality.

When MJ wore the long shorts and shaved his head, the NBA copied him. However, the fundamentals of the game have not changed. Jumpshots, layups, defense, screens, boxing out, ball movement, etc, etc, etc….all exist today just like they did 50 years ago.

Just because the investment game has changed, doesn’t mean the fundamentals have. Asset allocation*, diversification*, re-balancing, inflation risk, re-investment risk, etc….all are fundamentals that HAVE NOT CHANGED.

So is a LONG TERM mentality.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not ensure against market risk.

Creative Commons License photo credit: Brian Hillegas