Markets, Timing and the Long Term Investor – October 2012

Debbie’s Blog

Build your own financial point of view.

Markets, Timing and the Long Term Investor
October 10, 2012

by: Debbie Lovett, CFP®

What makes someone a long term investor? John Maynard Keynes, a premier economist in the 20th century, noted that in the long run, we all are dead. Most definitions of long term investing that I’ve run into are not quite that long.

Having just left a makeshift reunion of old camp friends, I’m struck by the large blocks of time that pass by with a blink of an eye. Smaller packages of moments and minutes, hours and weeks are really what comprised those 25 years, but you could have fooled me as I sat immersed in names and stories from the 1980s, as vivid to me as my commute in yesterday. Similarly, I’m often struck with the peculiar ways that the passage of time can toss perception on its ear in the world of investing, too.

Time undoubtedly plays an important role in investing. The power of compounding, which can only happen through time, is one of investing’s golden rules. Part of my own mantra for clients involves being a long term investor. But what exactly does being a long term investor mean? How much time must you commit and how do you manage the reality of all of the smaller packages of time along the way? Balancing between past, present and future is as much about perception as any hard line data. For example, in the US financial markets, we currently have a 5th anniversary on our hands. On October 9, 2007, the Dow Jones Industrial Average and the S&P 500 both reached their all time highs (yea!), followed by a scarring bottom just 17 months later on March 9, 2009 (hiss). The fifth anniversary of those market highs gives us these statistics:

Additionally, just three years ago people were bemoaning the lost decade of US equity investing. We talked about it in meetings; clients, bankers, brokers, trustees. Equities were a disappointment. Equities were a bust in the long term, quite different from the expected short term bumps along the road. Due to the 55% drop in the US equity markets from the peak to the bottom, ten years of equity market gains were wiped out, thus making long term investing seem like a weightless premise. Move the clock just one three year block forward from that lost decade and the perspective shifts, as it always will shift. Just as the image in a kaleidoscope can’t freeze as you turn it, returns don’t stay stagnant as weeks and months pass. In this case, over this past three year block, US equity markets have shifted markedly up. The past decade now registers as a decade with average annual gains of 8.54% each year as reflected in the S&P 500, an often used measuring stick for US equities. 8.54% per year is a far cry from flat or lost. The five year trailing period now carries the bulk of the shrapnel from the market fall—that data piece now registers as flat. The three year annualized trailing returns are a healthy 12.72% per year which is pretty exciting for anyone naive enough to hope that the next stretch of time will be that three year pattern plus a similar three year pattern plus another and another … you get where I’m going.

Where you are standing in time when you measure — and what you measure makes a difference. The perspective one chooses supplies different answers. Three years ago full decades could be flat. Three years later, full decades yield results. What will the numbers reveal three years from this point in time? I’ll go so far as to say that we’ll see a shift of some sort either up or down, unless of course it instead remains flat. As with everyone else, I’m much smarter when looking backwards at such things.

My experience has taught me not to bet on the direction of the market, even in the long term. Lost decades exist. Instead, focus on your own needs and contributions during future blocks of time. In the next three years will you be a net saver or net spender? In the next five years will you need to be taking out money for life’s plans (retirement, travel, relocation)? Because no one can predict where the markets will be at future points in time, instead focus on where YOU will be and what you will need to get there. This exercise should bring you some answers, and if not, a financial advisor can walk you through the steps. Given your needs and your resources, what funds can stay in the market? What funds should you quarantine to keep your plans for the future away from market uncertainty? In place of risky bets on the market direction, put emphasis on your own movements through time.

It’s a recurring story: the next extended drop in market value will create pain for those needing to sell assets at that specific point in time. Conversely, market value drops create buying opportunities for those whose short term needs are covered and can therefore place excess assets into longer term investments. While others may be feeling a squeeze, long term investors can buy low and wait out the storm (ride up the storm, to be more precise).

1) Keep your liquidity—your quick and taxless access to cash—at levels that allow you to address your needs for the next two to three years.

2) Only invest assets in the market that can wait out market storms.

To me, that simple 1-2 combination best captures the workable idea of long term investing. Investing long term does not guarantee that you won’t experience flat, lost decades. We’ve learned that. It also doesn’t guarantee a level of return based on calculated risks. Long term investing is about placing only an appropriate level of dollars at risk in the market and recognize that the course you’ve set those dollars on will have varied ups and downs as they ride the sometimes lazy and sometimes rapid fire market swings. Markets can be unforgiving. Markets can drop 55%. Long term investors don’t necessarily like those facts–but they understand them and are willing to play by those rules. And also seem to sleep much better for it.

One final point. Long term investing does not have to be a staunch buy and hold exercise: buy it today, forget about it until many moons and market cycles have passed. In fact, there are strong arguments for watching and tweaking and simply selling specific investments that never fit their intended purpose in a portfolio. Long term investing, to me, allows one to make adjustments in reaction to macro ideas (larger trends, anticipated shifts in asset class effectiveness under predictable circumstances, taxation projections for coming years) and it does not force you to react to price depressions that ripple the markets. Fear based selling or selling at low values because you need the cash does not drag the long term investor down.

In short…

Time plus more time equals perspective.

Side note about the numbers: A colleague pointed out that the numbers in this piece all ignore inflation. Most performance numbers are presented with inflation left on the sidelines and I’ve followed the crowd. Performance numbers are also widely presented before taxes. Some are before fees. Just as I caution against naively making decisions based on numbers frozen in time, I note how important it is to understand what the numbers that you choose to review actually reflect. After inflation? After tax? After fees? The above numbers reinvest dividends and gains but do not reflect the effects of inflation, taxes or fees.


Debbie’s Blog wants you to build your own financial point of view. This is particularly helpful when working with financial advisors. It’s always better when everyone is speaking the same language, and finance is not a language that needs to rest somewhere out of reach. At Blue Prairie Group, we encourage an open and dynamic relationship with our clients, perceiving them as partners, not customers. That partnership is what supports our 98% client retention rate over our ten year history.

Like the shade tree mechanic who knows their way around an engine, you can have that same sort of savvy when checking under the hood of your portfolio.

© Debbie Lovett 2012.