You may have seen me espouse the following fact before. It’s one that still completely astounds me. 95% of investors, including mums and dads, business owners and the so called astute investors lose money from investing. How does this happen? And why?
A lot of it is attributed to a thing called short-termism. That is, an excessive focus on short-term results at the expense of long-term interests. When you have a short-term focus you have little regard for long-term strategy and it can be quite destructive. The recent Global Financial Crisis is a good example…was there a short or long term focus in the solution? SHORT TERM of course!!! If they let the banks and bad businesses collapse around the world, then the economy would be stronger by now.
Yet we are all guilty of this. I certainly have been. I have suffered from short-termism in my business and in my investments. I lost good staff in the business as I had a short term view on where the business was going and where they fitted in. It cost me profit and good team members. Applying short-termism to the share market also proved costly early in my investing and lasted for years as my focus was quick gain rather than building wealth. Who wants that? Real wealth is boring…….well so I thought. But the learnings from the errors I experienced have proved to be a great gift for all my investments and business decisions since.
Most of us overestimate what we will achieve in 12 months and underestimate what we will achieve over a period of 10 years. Fidelity International states that “Short-termism is unequivocally one of the most serious behavioral biases investors must overcome in their effort to make real wealth. Our natural preference for short-term rewards – or instant gratification – over delayed gains has long been noted by psychologists as a feature of the human condition that extends to many aspects of our behavior”.
Therefore it seems, as investors, we are actually wired for short-termism. We often value short-term gains more than value delayed gains. It makes us feel good and releases the same dopamine chemical we get from eating delicious food, drinking alcohol or smoking cigarettes. In the article “Behavioural finance: Why ‘short-termism’ is hard wired in investors”, the author puts forward evidence showing “most people would take $100 today over $200 in a year’s time but would not take $100 in six years over $200 in seven. There is no rational reason for this inconsistency; the trade-offs are identical in monetary terms”.
To take a long-term view, we must recognize that our brains are wired against us and patience really is a virtue when it comes to investing. Have a look at your current investments and determine how short-termism is serving you? What steps do you need to take to overcome this rush of short-termism? The first is to acknowledge this focus exists and there are elements of short termism you need to fulfill. If you don’t you are probably kidding yourself. Allocate a small portion of your wealth for short term investing that will meet this need. Then get a balance and asset allocation across different classes of assets (not correlated) with a 10 year plus view and you are on your way to great wealth preservation and creation.