How often to you make a decision because of a recent event? For example, how likely are you to buy snow shovels and salt after a blizzard? Not because you ran out and need these things, but because the last blizzard influenced your decision? The answer is most likely more often than you are aware or would like to admit.
Short Term Reactions
As humans we tend to focus on the short term and let recent events shape our views. This happens with everything. From snowstorms to terror attacks, even when it comes to investing. Remember Brexit?
For example, how long did it take before you jumped back into the market after the crash in 2007-2008? For many, they are still standing on the sidelines, fearful of the next crash. While sitting out they missed out the tremendous gains over the last seven years. And before you think all those gains are worthless when the next crash hits, think again. As long as you are investing for your time horizon and risk tolerance, you can ride out any turbulent market.
(Photo Credit: stevepb)
But getting back to focusing in on the short term when investing, what are some signs we are acting in an irrational way based on recent events and how can we overcome this?
Signs You Are Focusing Too Much on the Short Term
There are many signs I can point out to show you that you are focusing in on the short term. Here are a few of the more common ones:
- Too scared to invest: the market dropped and you won’t invest at all or are putting all of your money into bonds since they are safe investments
- Thinking the market will never drop: the market has been on a tear upwards and you are convinced that stock prices will never come down
- Having an urge to pull out: stocks have been doing well, but you know bad times are coming and you just can’t shake the urge to start selling
- Bad quarterly reports: you see a couple companies miss earnings and think that your holdings will do the same
These are just a few of the more common signs of having a bias towards the short term. I’m sure we all can relate to these examples, myself included. The question becomes how do we overcome the bias of the short term and look at the long term?
How to Stay Invested for the Long Term
The answer is simple in theory, harder in practice. It is to simply have an investment plan. When you have a thorough investment plan created, you know why you are investing the way that you are, why you have the specific investments you have, what your goals are and what your risk tolerance is.
When the market does drop and you get scared, you can refer back to your plan to see why you are doing what you are doing and can feel a sense of relief that you are doing the right thing for you and your goals.
The key though is after making the investment plan, you must follow it. You can’t just put it into a drawer and let it collect dust. You have to refer to it and even update it as life changes. If you can do this, you will be better positioned to overcome the short term bias we all deal with and be a successful long term investor.
But it is hard. The news and media like to hype up the bad and this gets our emotions involved and we make bad decisions based off those emotions. This is why it is good practice to add some notes into your investment plan for your future self. Try to predict some bad times that may happen and while you are in a positive frame of mind, give reasons why if scared, in the moment you should ride out the volatility and not sell and run.
While you won’t be able to predict all potentially bad scenarios, you can do yourself a lot of good by adding this section into your investment plan. It will provide further proof (and a level headed approach) to dealing with tough turbulent times.
It’s easy to focus in on the short term since it is in our DNA. But there are steps we can take to overcome this flaw. By creating and maintaining an investment plan, you put the odds in your favor that you won’t react poorly in the short term, which will lead to potential greater success in the long term.