It’s Hard to Think Long-Term

Michael Batnick writes that one of the biggest challenges investors face is their desire to tinker. Like Pascal said, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”

You don’t dig up a young tree every time storms. It needs time to grow. The roots can handle wind and rain and thunder. Likewise, a diversified portfolio needs time to grow, and can also withstand some discomfort. Beyond discomfort, investors will have to survive tornadoes from time to time. 

Morgan Housel recently framed how different investors might deal with market turbulence: If you view every debt-fueled recession, market crash, and asset bubble as an example of your fellow people acting crazy you might get cynical, which makes it hard to be a long-term optimist even when you should be. If you view them as inevitable you realize they’re just part of the ride and an occasional reminder that the fasten-your-seatbelt sign should never be turned off.

So, finally, here are the three things you can do to think and act for the long-term:

• You can’t think long-term if you’re not saving money. Everyone knows what their income is, not everyone has a handle on the other side of the ledger. You don’t have to create an agonizingly detailed spreadsheet of every Rupee that goes out, but you must have a rough idea of what you can afford to save every month. And those savings must be automated. When your income comes in, savings go out. Pay yourself first. (I understand that saving money is a luxury many people don’t have, but if you’re reading this, I assume you’re one of the fortunate ones)
• You can’t think long-term if you are experiencing a short-term cash crunch. The best way to avoid this is to keep your big-ticket items to a reasonable percentage of your income. Coffee won’t break the bank, a mortgage and car payments can. The second best way to avoid a short-term cash crunch is to have cash in the bank. Six months seems reasonable, but if you’re responsible with your bills, I’m okay with having less.
• You can’t think long-term if you take more risk than you can stomach. If you thought about how much higher the market might be in twenty years, would you care how low it went tomorrow? In theory no, in reality, obviously yes. And this is where planning comes into play. If you really hate seeing your account go down, then figure out where your maximum pain point is and work backward. For example, if 10% is the maximum loss you can tolerate, using the assumption that stocks can get cut in half, you should have no more than 20% of your portfolio in stocks at any time. Of course, this will severely limit your upside, but investing isn’t just about maximizing return, it’s about maximizing a return that you can reasonably expect to achieve.

Batnick concludes that if these seem obvious to you, good, that’s the idea. This isn’t rocket science. Thinking long-term is hard, which is why it can be so rewarding. Acting on short-term impulses, on the other hand, is a short cut, which rarely works out well. The most successful investors are able to ignore the things today that they know won’t matter tomorrow.