Watch the tide, not the waves: Why a short-term focus could jeopardise your future goals

We’ll experience several coronavirus-like market shocks in our lifetimes – but although such volatility can be unsettling, it’s important to keep an eye locked firmly on the future.

While you perhaps wouldn’t expect us to open an article on investment with the topic of marshmallows, a famous psychological experiment featuring the popular confectionery item serves an important lesson in why ‘patient investing’ can pay off in the long-term.

The Stanford Marshmallow Experiment was conducted in the early 1970s at Stanford University, and involved placing subjects – children aged 3-5 – alone in a room, presenting them with a simple choice: to eat the marshmallow in front of them right away, or hold out for 15 minutes and receive two as a reward.

As you might expect, some children quickly snapped up the treat, while others managed to resist the temptation. Interestingly, follow-up studies many years later appeared to show that those who were able to delay gratification also enjoyed better life outcomes.

Today, the research stands as a cautionary tale about the dangers of prioritising short over long-term thinking – and the value of staying focused on your future goals.

The shortcomings of short-termism

We can all be inclined towards short-termism, especially in times of crisis. The 24-hour news cycle doesn’t help, as it makes us far more aware of short-term fluctuations than long-term trends and opportunities.

But despite unwelcome stock market shocks, keeping sight of your long-term objectives is key. As COVID-19 encourages us to re-evaluate our financial well-being, it’s entirely understandable that you might be tempted to let emotions drive your investment decisions.

Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management, commented:

“Short-termism is something that’s hard-wired into our DNA. We’re guilty of it all the time, in all areas of our lives. During a period of great fragility, marked by unprecedented job insecurity and market volatility, it’s hard not to fixate on immediate needs, at the expense of working towards long-term goals.”

And yet, she says, we need to find a way to temper our fears and resist the temptations of short-term gains, certainly in the context of our investment strategies. A split second of doubt could see you crystallise a decision you otherwise would not have made, and that decision might have unintended consequences.

Negative news headlines will likely test you emotionally – anyone investing for the long-term will experience several such economic crises (or ‘black swan’ events) – as the graph below shows.

Source: Financial Express. Produced on a bid to bid basis, capital returns. Date to 28 February 2020. Past performance is not indicative of future performance and you may get back less than you invested.

Taking a step back

“The last thing you want to do is cash in your investments when prices have fallen, and then try to buy back in after they’ve bounced back up,” says Andrew Shaw, Head of Partner Development and Communications at St. James’s Place Wealth Management. “When we suffer these market shocks, or black swan-type events, we first need to take a step back and consider whether we’re speculators or investors.”

So, rather than focusing on short-term fluctuations and evaluating the performance of our funds against a benchmark or index – a habit that will only encourage us to keep churning our investments – it’s more important to compare returns alongside a reformulated set of objectives.

You need to keep in mind what it is you’re trying to achieve, and how (and when) your investments are going to help you get there. That said, as Shaw acknowledges, this can be easier said than done:

“Stock market crashes are often emotionally charged. When they do inevitably occur, people can feel compelled to react; to do something to protect themselves. We see it time and again.”

The golden rules of investing

To stay on track, we should look to the timeless, golden rules of investing. This means being in it for the long haul, with a goal or plan to guide us – and acknowledging that there will always be times when markets are more volatile.

It also means avoiding changing a long-term strategy because of a short-term correction. We don’t know when volatility and market shocks will happen, so it’s essential for investors to have basic principles in place that they can stick to over the long-term. “It’s time in the market, not timing the market that’s key,” Shaw points out.

By adopting this approach and sticking with it, patient investors – who invest regularly – will be able to benefit from so-called ‘pound cost averaging’. This simply involves investing at regular intervals, resulting in more shares being purchased when prices are low, and fewer shares purchased when prices are high. Diversification is essential too – by spreading your money across multiple types of investments and geographic areas, you can potentially mitigate our exposure to risk.

Abiding by these rules does require discipline, though. And that’s where financial advice can really come into its own.

Riding the waves

When going at it alone, it can be all too easy to let your emotions drive your investment decisions – especially with the current volatility of COVID-19, the US Election and Brexit – but this can have damaging results. But whatever you’re feeling, avoiding the temptation to overreact is key to your long-term investing success.

It’s crucial to have a sense of the long-term outlook, and an experienced financial adviser can evaluate investment performance in the context of long-term objectives – even in times of crisis. Remember: watch the tide, not the waves!

A financial adviser will bring you back to your core priorities, and offer the emotional discipline required to ensure plans are acted upon, by providing guidance, support and stability to help you stay on course to reach your financial goals.

Want to know more about how embracing the long view could improve future prospects? At Wellesley Wealth Advisory, we can walk you through it. Contact us today!

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.