Long Term V Short Term Investing

Andrew Haldanes speech (Patience and Finance)mentioned last week is a fertile ground for many thoughts, articles and blogs about finance, markets, economics and the growing need for instant gratification that we humans seem increasingly to desire.

We believe passionately in matching your investment or trading strategy to you goals, time frame and the market you are in. We think that mismatched timing and time frames is often the cause of traders being stopped out and investors being wiped out, often by margin calls. All too often we hear tales of I was right but got cut. That's no fun and in fact is debilitating in that it leads to second guessing yourself and a downward investment/trading spiral

We all trade and invest to make money but often our emotions can get in the way as Daniel Kahneman and Amos Tversky, amongst others, showed so well. And so it is that re-reading Andrew Haldane's speech we are struck by the point he made on "hyperbolic discounting" (which is the fact that peoples preferences alter as distant outcomes become closer to the present) that as time truncates people can exhibit preference reversals.

Anyway, Haldane says "the implications of such behaviour are far reaching. The patient planner becomes a spontaneous doer when outcomes are within reach...the long term investor becomes a short term speculator if assets can be cashed. As temptation beckons, the devil on one shoulder whispers more seductively on the other. Preferences switch as the distant becomes instant."

That is often the methodical process which built up substantial investment positions should not be replaced with an aggressive on market approach once retirement beckons or people start managing their own investments. Leverage, whether equities, FX or MIS are other examples where proximity (or perhaps just the positions) changes behaviour.

We have seen many examples of exactly what Haldane says over the years and certain investment strategies that blew up in the GFC are cases in point.

We don't want to sound like anyone's mum or dad but one of our core tenets is to make money slowly and keep it. That's not to say we are passive but we do have a plan. So think about your goals prior to investing that way you and your planner/adviser can then talk about options, strategies and set-ups. Then you can move forward together.