Mick Jagger was onto something in 1964 when he sang “Time Is On My Side”. It turns out that many of the concepts financial advisors employ to gain advantage for their clients are driven by the concept of time, and the patience investors must have to let time work for them. For the long-haired British rock group Rolling Stones, time was indeed on their side when they sang this first top ten hit on the Ed Sullivan show. Mr. Sullivan was so offended by their long hair that he declared he would never invite the Rolling Stones onto his show again. But over time, as the notion of men having longer hair became more mainstream, they made five more appearances on the Ed Sullivan show.
An investor is, by definition, relying on time to generate returns. The expected return from any investment is a function of time, and the amount of variation of returns around the historical averages is expressed as a function of time. Life has a time limit for each of us, although we don’t usually know what that time limit is. And so all these variables go into an investment plan to chart out what we can expect in the future. Our financial planning program can generate a chart or table showing you what we expect your portfolio to be worth, how much you will pay in taxes, and how much you plan to spend, for every year through the end of your life. If you outlive your money, because your portfolio wasn’t big enough to keep up with your annual living cost multiplied over the years you will live, then that’s called “superannuation”.
But investors are dealing with time in other ways too. The field of behavioral finance has documented that many investors pay more attention to recent history than to events that have receded in time. It’s called the “availability bias” because recent events are more available to an untrained memory. For instance, the latest events in the Ukraine, where possible sanctions could impact the European economic recovery, have some investors losing sleep at night. But these same investors might not be drawing on any of the valuable lessons from how the stock market performed during the decades of the cold war, when nuclear annihilation of the United States by the Soviet Union was a very real threat.
Over the past two decades, investors in the stock market have become increasingly impatient. Many blame the growing influence of what we at BIP call the “financial entertainment industry”. Every media form in existence seems to offer some commentary on investing, and the mindset is often about developing an investment thesis and then expecting the market to immediately agree with you. Think about that, if you believe the market is currently wrong about the price of a security or asset class, what evidence is there that the market will catch up tomorrow? And even when investors are hiring professionals to be tactical for them (probably a waste of time in our opinion), the impatience has grown. According to a firm called DALBAR that has studied this phenomenon, the average investor in an equity mutual fund now holds that fund for only 3.3 years http://www.qaib.com/public/default.aspx.
An investor who has patience is arbitraging the market and taking profits from other investors. If you’ve ever bought a car, and sat at the salesperson’s desk for hour after hour, you know that time is a powerful negotiating tool. The car dealer knows before you ever walk onto the lot that making the sale is going to take the better part of the day. And so the salesperson is already prepared to spend four or more hours wearing you down in a negotiation that you may have thought should be over in 15 minutes. Investing works the same way. If you are the investor who can keep the long-term view and stick to your investing plan, then you are more likely to buy equities when the market drops and to sell equities when the market rallies (buy low, sell high). The investors on the other side of your trades sold at the bottom and bought at the top, so you took some of their profits. You can get a lot of satisfaction from doing that!
This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. Indices are not available for direct investment.