Is Investing About the Short Term or the Long Term?

In investing, it’s natural to seek out clues that we’ve made the right choices, right off the bat.

We check the prices of our investments every few minutes, though they’ve barely had time to move in any direction. And, if we find, by some chance, that the price has gone down, we start asking questions right away:

Should I have bought that stock?
Did I buy the right fund?
Is this portfolio manager my best choice?

Unfortunately, these questions don’t address the most important aspects of effective investing. What we should be asking is if our portfolio is properly aligned toward our overall, long-term goals.

Granted, the financial services industry, along with the financial media, is happy to oblige your thirst for instant feedback.

With a few clicks of your mouse, you can learn how the value of your portfolio has changed over increments as tiny — and ultimately irrelevant — as ten minutes.

You could check out five different analysts’ opinions of what your stock will do this morning – and then get the word from six more telling you what the market will do next week. You can find seven different ratings on the mutual fund manager of your fund of choice.

And if you’re tech-savvy, you can set your BlackBerry to scroll price updates on all your portfolio positions all day long — so you’re always up to the minute on “how much you have.”

Is this flood of financial information really telling me anything?

The reality is that none of this intensive monitoring indicates to us whether or not we’ve made the right choices, in terms of our long-term investment goals. If anything, all the rapid input can be a distraction, and can lead to serious investing mistakes.

The temptation is natural: you know that you’re investing towards financial goals that span decades, but you find yourself seeking positive reinforcement five minutes after you’ve put your money in!

Still, if you’re doing anything beyond reviewing your quarterly statements, there’s a significant likelihood that that the feedback you’re receiving will lead to poor investment choices.

The proper way to decide if you’ve made solid decisions is to focus on portfolio analytics — not individual positions.

Ask yourself…

How do portfolio positions correlate with each other? In other words, when one positions “zigs” – does another one “zag”?
What is the impact of each position on the volatility of the total portfolio? Will adding one increase the volatility of your portfolio, while keeping the same return? Or can you increase your returns while reducing the volatility?
How tax-efficient is the portfolio? What are the total expenses?
Is the portfolio thoroughly optimized to harness the most risk-adjusted return?

Of course, the answers to these questions are much less readily available than the kind of noise the financial outlets provide us with – and that’s where problems start.

The current (and temporary) bear market encourages buzz from “doom and gloom” sellers, and creates a focus on loss of wealth. The irony is — even with all the debate about market dilemmas – wealth loss occurs mostly as the result of investor behavior.

This might seem like an oversimplification. However, given a long-term perspective, the markets have historically risen. So if markets are rising, how else could people be losing wealth?

That’s right – they’re making bad decisions based on insufficient data.

Your success as a resilient investor depends mainly on your behavior and the structure of your portfolio, not on moves based on short-term feedback — or worse yet, what shows up on the cover of Money Magazine!

photo credit: epicharmus