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Long-term investing might mean different things to different clients, but a base definition is the concept of holdings assets for 10 years or more.
Indeed, a decade is a lengthy period of time and a lot can happen over that span. Clients’ lives changes, whether it be by marriage, divorce, growing families or retirement. Of course, markets evolve, too. As is often said, stocks don’t move up in straight-line fashion. That’s actually one of the reasons investing for the long-term is appropriate for so many market participants.
“A long-term investment is an asset suitable for an investor with a time horizon of more than 10 years. Because short-term price fluctuations aren't as threatening over longer periods of time, long-term investors are often willing to accept more risk in exchange for the potential to earn higher relative returns over time,” according to Seeking Alpha.
Interestingly, the validity of long-term investing was highly scrutinized in the aftermath of the global financial crisis – rightfully so – with some critics saying it was a relic of a bygone era. However, many market participants simply don’t have the desire nor the time to be active traders or even monitor their investments to the point that they’re moving in and out of positions on weekly or monthly basis.
Long-Term Alive and Well
The validity of investing for the long-term has played out in real time over the past several years. Of course, hindsight is always 20/20, but consider the following. Investors that were shaken out of equities in March 2020 were likely left disappointed by that decision with six months or by the end of that year.
Likewise, though to a lesser extent, market participants that abandoned stocks last year probably aren’t happy with that decision halfway through 2023.
“The current stock market rally offers a prime example of the importance of staying invested and avoiding emotional, financial decisions,” notes Nationwide’s Mark Hackett. “On June 8, the S&P 500® Index closed at 4,293, marking an impressive rally of just over 20% from its value on October 12, 2022. That day will likely be noted as the low for the S&P 500 since the beginning of the 2022 bear market. If that’s the case, the S&P 500 would have been in bear market territory for around 248 trading days last year. It took approximately 164 trading days from the October 12 low for the S&P 500 to emerge from that bear market.”
Advisors Can Help Clients Avoid Behavioral Mistakes
Advisors don’t need to be scholars in behavioral finance, but having some foundation in this concept can prove fruitful in helping clients avoid turning temporary errors into permanent mistakes.
Clients, particularly those nearing or in retirement, shouldn’t be engaging in market timing because chances are, when left to their own devices, they’ll sell low and buy high.