By now, regular readers know I bang on – a lot – about long term investing.
(If you’re new here, welcome. And just take my word for it! Or, just wait. You’ll find out.)
Why do I do that?
Because I am absolutely convinced that a long term perspective might just be the greatest superpower an investor can have.
See, you can be a great ‘stock picker’ – and I’ve known some – but without the ability to have both the courage of your convictions and the ability to tune out the noise, it’ll all be for naught.
Indeed, some of the best ‘analysts’ I’ve known or followed have been pretty ordinary ‘portfolio managers’ (of their own or others’ portfolios) because even though they managed to identify great investment opportunities, they lacked the ability to see it through.
They were distracted by the latest worry. Or the latest opportunity. Or the plethora of other noise that bombards the investor these days.
Some jump at shadows.
Some jump at very real – but temporary – problems.
Some get so caught up in the ‘game’ of investing, they miss the real opportunities.
And some are so busy overthinking, that they miss the forest for the trees.
I remain convinced that trying to show how smart you are – by having a view of every possible eventuality, and acting on them all – is counterproductive.
Rather, I try to be “roughly right”.
As I’ve written before, I’m rarely the smartest bloke in any room.
And I don’t try to be.
I try, instead, to do the simple things right, as often as possible.
And chief among them is keeping my eyes firmly on the long term prize.
It truly is a case of Aesop’s tortoise and hare.
I’ll never know everything.
I’ll be wrong, more often than I’d prefer.
I’ll make mistakes.
I’ll be blindsided.
Yes, I’ll try to be right as often as possible. Of course I will.
But I’m not going to tie myself in knots chasing perfection, or being paralysed by fear or occasional loss.
The pursuit of perfection is admirable, but too often it’s both impossible AND prevents a gtreat, if imperfect outcome.
And, yes, a long term perspective is a key weapon in the pursuit of really good returns.
But it can pose a problem, at least for some of us.
I know that for a fact, because one Motley Fool member emailed us, recently, with a really useful observation:
“I have been thinking off and on about the relevance of some of the advice/commentary that we receive to those of us in the “twilight” years. I am sure there are a number of members who have clocked up to 80+ or will soon do so.”
“We hear comments about the investment time frame of 5-10 years or more which to some extent is not in the forefront of our thinking.”
“I see an issue because all the team are nowhere near that age and may struggle to imagine a much shorter investing time frame.”
“I understand that the normal approach is to have a much more conservative portfolio as the years go by which is maybe why the Everlasting Income portfolio is more in tune with the stage we find ourselves in. It could be argued that we might be looking at a portfolio that looks OK for the short to medium term and give good returns but perhaps does not have a future stretching decades ahead.”
He has a very good point.
I spend a LOT of time talking about the benefits of compounding. And the key element of that is time.
It is simply much easier to improve your returns by adding time than by adding extra points of annual return.
(And if you do the latter, then adding the former helps even more. It’s logic that’s simply impossible to ignore.)
But what if you don’t have those years? Or worry that you mightn’t?
It’s a really, really good question.
(And while the team and I will happily be complimented on our youth as often as you’d like to throw them at us — and it’s true that none of us are near retirement age just yet — also know that I’m also managing my retired mother-in-law’s portfolio, so I’m not blind to the issues he raises.)
Now, here’s something about sales that you likely know: it’s easier to make a sale by either confirming someone’s preconceptions or flattering them, than by telling them the truth.
But I’m not here to make a sale. I’m here to tell the truth.
So let’s get to it.
I don’t know of a reliable way to outperform the market, consistently, over short periods of time.
But lest you think I’m focussing only on my own shortcomings, let me be clearer: I don’t know anyone else who can offer that, either.
Could I have saved you from the 38% market slump in February and March of 2020?
I guess.
I mean if you said ‘Give me a strategy with the minimum possible chance of loss’, I would have walked you down and introduced you to the branch manager at one of the government-deposit-guaranteed financial institutions.
And that is perfectly fine as an investment option, if your preference is for a loss-free portfolio.
(Nothing is truly risk-free, by the way. There are circumstances in which the government might not be able to meet those guarantees. Exceedingly unlikely, of course, but possible. Remember, my job is to tell you the truth, not just ignore these risks, however small.)
I have zero issue with someone who is happy to earn almost nothing on their portfolio, in exchange for capital security, as long as they’re appropriately informed as to the range of likely outcomes, and what they’re giving up, in exchange for that security.
But, it’s when people want sharemarket-like, positive, returns over short periods that I feel the need to raise my voice.
See, I don’t believe it’s realistically and repeatedly possible.
There’s just too much volatility.
Which is okay, if you have a long term horizon.
But if you don’t?
Well, then we’re in compromise territory.
I don’t blame that member for wanting a different message and different advice.
Because he doesn’t feel like the long-term approach is right for him.
But it might be more applicable than he thinks. Remember, if you’re in your 80s, you could live for another 20 years. That’s pretty long term. I wouldn’t be rushing to spend my last dollar just yet!
Indeed, I checked the stats. The average 80 year-old can expect to live for another 10 years — the outer limit of the ‘long term’ advice he refers to.
And if the average is 10 years then yes, unfortunately some won’t live to see 90 (sorry to be the bearer of sombre news) but others will see 100.
So here’s what I can offer:
(And be warned – I have no magic answers.)
My general advice has always been – and continues to be – that any capital you need to spend in the next three years shouldn’t be in shares.
Now, if you’re living off an income stream from dividends, that’s a whole different story. You can afford share price volatility while you bank those dividend cheques.
But if you need to sell down your capital to live, you need to have three years’ of expenses in cash.
No, it won’t earn much.
Yes, there’s opportunity cost.
But I’d rather earn 0.1% in the bank, than have to sell shares when they’re down 10%, 20% or 40% because I need to pay the bills.
And over more than three years?
I’d put that money in the market, personally (as long as you can stomach the emotional impact of share price volatility).
Don’t get me wrong: your shares can still be down over 36 months. There’s no magic rule or market mechanism that offers certainty over that timeframe.
But I reckon that more often than not, three years is about the right time frame to balance the risk of volatility with the reward of investing.
And if you want to invest in shares, and get a return in less than 36 months?
I can’t help you.
And be very, very careful of anyone who says they can.
Maybe they’re lying to you. Maybe they’re not lying, because they believe it… but are still wrong.
Maybe they’re employing some clever financial tricks to make it look good (you’ve heard of bumping up a property’s sale price to then give a ‘rental guarantee’, right? Some share promoters — even some fund managers — aren’t exactly above paying income back to you from your own capital).
Or maybe you’ve found the needle in the haystack – the unicorn who can offer, and deliver, such wonderful short term gains.
Just remember that even Warren Buffett’s company, Berkshire Hathaway (I own shares) has had periods of negative performance. If Uncle Warren can’t do it…
Bottom line?
In both my own investing and in my financial advice, I recommend taking a long term investing approach.
And at almost any age, long term investing is still probably the best advice I can give you, along with putting some capital aside to pay three years’ worth of bills.
I wish it was different. I wish there was some perfect solution that offered the best of all worlds.
Unfortunately, in my opinion, there’s not.
That’s probably not what he wanted to hear.
But I’m in the business of telling the truth, not saying whatever our members want to hear, just to make a sale or confirm their existing beliefs.
And it probably costs us some business.
But it means I can sleep at night.
And if you’re not hearing those uncomfortable truths from the people you’re getting advice from… well, you might want to reconsider who you listen to.
Fool on!
The post Too old to invest long term? appeared first on The Motley Fool Australia.
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Motley Fool contributor Scott Phillips owns Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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