The Art Of Long-Term Investment Strategies In A Short-Term World

Gene Goldman is the Chief Investment Officer at Cetera Financial Group.

Traditionally, long-term investments were those held for 10 years or more. However, this standard has shifted significantly. As of June 2020, the average holding period of shares had decreased to five months—a substantial change from the average of eight years in the 1950s.

In the past, it was thought that projecting data beyond 10 years for long-term investments was too difficult and prone to significant errors. Today, with advancements in technology, shorter attention spans and a desire for immediate returns, this outlook has changed, dramatically shortening investment time frames. As the nature of long-term investments evolves, here are some key considerations investors can keep in mind to maintain a successful portfolio.

Common Challenges Of Long-Term Investments

Time is often cited as one of the most important factors in long-term investing. Over extended periods, investment assets tend to rise in price due to market growth, inflation, economic prosperity and the compounding of interest and dividends. Simply put, predicting an investment’s performance is challenging due to the frequent fluctuation of these factors.

Despite the proven benefits of long-term investing, many investors find it difficult to maintain a long-term focus. Historically, investors have tried to navigate market ups and downs by timing their investments—buying during lows and selling at highs. Unfortunately, market timing has proven to hinder long-term results, as predicting precise market highs and lows is nearly impossible.

The Impact Of Economic Cycles

Assuming investors avoid market timing strategies, there are still long-term factors that influence investments. At a fundamental level, the economy is a key driver of equity returns. When an economy is growing and exceeding expectations, company revenues and earnings generally increase, making these companies more attractive to investors.

Investors can adjust the overall risk of their portfolio based on their assessments of economic performance. However, a challenge arises because equity prices often reflect events anticipated six to nine months in advance. As a result, when the economy begins to show signs of improvement, the potential growth may already be reflected in stock prices. For example, during the Covid-led recession of 2020, equities began to price in a recovery even before the economy reached its lowest point in April.

Differentiating Between Market Noise And Reliable Long-Term Trends

Short-term market noise—driven by daily news, company events, investor sentiment and economic data releases—causes temporary fluctuations that can affect a long-term investment’s value.

In contrast, long-term trends are typically broader, driven by fundamental investment factors. These may include demographic trends, economic cycles and technological innovations that impact the economy or large segments of the market.

Key Long-Term Investment Consistencies

While many aspects affecting long-term investments are constantly changing, certain elements remain consistent. Financial advisors may rely on these consistencies as they seek to help clients achieve the best possible outcomes.

To begin with, diversification is a time-tested strategy to mitigate market volatility. Exposure to varied market sectors that perform differently—they zig when the rest of the market zags—can help reduce the impact of severe market swings.

Investors should prioritize maintaining their investments without focusing on market timing, as predicting market highs and lows is extremely difficult, and emotional biases can lead to poor decisions.

Volatility is a normal aspect of investing and should not deter investors. The S&P 500 has seen an average annual return (AAR) of 13.2% since 1980, despite an average intra-year maximum drawdown of 14.2%. Remarkably, the S&P 500 has been positive in 36 of 44 years since 1980. The key takeaway for investors is that markets generally trend upward over time, and volatility is part of this journey.

How Can Investors Stay Informed?

By concentrating on data points that correlate strongly with market returns, investors can make well-informed portfolio decisions. These include corporate earnings growth, economic cycles, employment reports and forward-looking indicators like the ISM Manufacturing and Services Indices, while also keeping an eye on market valuations.

Importantly, strategic asset allocation should form the foundation of any investment strategy, with tactical adjustments layered on top. This approach keeps investors aligned with long-term objectives while allowing for minor portfolio adjustments in response to changing market risks.

While the factors influencing long-term investments have changed, investors can still benefit from these assets. The bottom line is that by staying informed as new factors affect the market, investors can position themselves for long-term success in a constantly evolving economic landscape.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

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