What The Criteria Should Be for Determining Time Frames and Horizons
The appropriateness of random stock market positions, with randomness being a matter of not taking into account market circumstances at all, is something we should be able to calculate, and when we do, we see that an even longer horizon is actually required to manage the risks involved.
There are views which are very prevalent in the industry which hold that all investors should be significantly exposed to the ups and downs of the stock market, even those in advanced years. What we tend to do is to mix this up with bonds, increasing the percentages of our portfolios in bonds as we approach and reach the time we’ll need the money, and whether a particular investor should be exposed at all to the stock market is left for the most part unexamined and just assumed.
This approach is very suspect though at best, as it fails to account for the fact that this strategy may not provide enough risk management. The strategy of buying and holding stocks or stock based mutual funds does little in itself to manage risk, and the shorter the time frame involved, the poorer it manages it.
While this strategy has been shown to provide good returns over time, the actual time involved is a couple of decades or more generally, and this is aside from whether other, shorter time frame strategies would be better.
If one’s time horizon is shorter than this, as it is as investors approach retirement for instance, then the assumptions of the strategy become violated, even though they may have been valid at the time that the strategy was first implemented.
This is something we should seek to avoid, even though this may involve taking more conservative routes than we typically see as one matures. If we cannot properly manage the risk involved though, then the plan is not a good one, and investment plans need to be able to adapt to changing circumstances, such as one’s horizon narrowing.
The Market Doesn’t Care About Your Plans
We may wonder why we’d ever even take into account one’s personal financial needs in determining investment time frames, given that this has no influence of course on the performance of one’s investments.
Whether or not one should hold any investment should at least account for the performance of the investments, and the market conditions that exist and may be expected to exist during a given period of time, but that doesn’t really count for anything in the way we typically approach investing.
In a nutshell, the performance of investments, whether it be stocks or anything else, is an objective standard, in other words our particular circumstances have no effect upon them whatsoever.
We seek to approach investments from a subjective perspective much of the time though, where we actually ignore the very factors that drive our investments, the market conditions, and instead focus on our own situation to decide things.
This is made worse by the inflexible investments that so many people choose, where the investments themselves are unable to manage risk very well.
Regulators shoulder a lot of the blame here, as in spite of their supposed goals of looking to protect investors, they instead force a lot of them to take on a lot more risk than they would otherwise, those who invest in mutual funds at least.
Mutual funds are, by way of regulation, exposed to much more risk than necessary by being forced into what amounts to basically buy and hold strategies, and while they have the freedom to change their investments around, they are exposed to the full measure of market risk by being forced to be long the market at all times.
Individuals also very often choose such strategies on their own, because that’s what they are told to do, that’s what they are told is the safest way to go in spite of this not being a very safe way to invest at all.
What we end up with is strategies which, by their very nature, ignore market conditions and the objectivity involved, and are left with nothing else but subjective considerations such as time horizons.
Once again though, the market doesn’t care when you need the money, and when we decide our investments based upon what are essentially irrelevant criteria, we do not even try to time them properly, because one cannot time investments properly this way.
Time Frames Should Be Based Upon Performance
It’s not that our time horizons don’t matter, but they certainly don’t influence performance. They certainly may and should affect our risk tolerances though, with longer horizons requiring a higher risk tolerance, and not the opposite.
The shorter the time frame, the less risk we face in an investment, and an extreme example of this would be with computerized trading, which now comprises the majority of trades on stock markets. Positions are held for fractions of a second with these trades, so the amount of risk for these trades would be the absolute minimum, at least in terms of the movement against you that you would be exposed to.
This is far from the realm of investing, but within the way people invest, there is a lot of latitude that can be used as far as how much one is willing to lose on a trade, and there is a relationship between how long one is prepared to hold an investment and the amount of risk one is prepared to take on.
Whenever we are looking to time our investments, which is something we always should be looking to do even with the longest horizons and risk tolerances, our risk tolerances and desired time frames will factor into things significantly, so it’s far from this not mattering.
However, the deciding criteria should always be performance, not convenience or anything else. If our time frame is short, and we wish to engage in a certain investment, even a mutual fund, we can and must adjust the timing to suit our needs, and not just hope that this happens by way of accident or luck.
Investing Is Really a Game of Skill Though
Luck would be a good description of the approach that most people take with their long term investments, setting them up and then leaving the results in the hand of whatever happens, hoping for enough luck to see their plan through successfully.
Investing is primarily a game of skill, whether we like it or not, and while many may be successful just relying on luck and timing one’s investments according to things that have nothing to do with the market, such as when we will need the money, this is simply not a sound approach to investing.
While many may desire simplicity in investing, buy it and forget about it until we need it, even though many have achieved results in the past with this that they deem to be at least satisfactory, this does not mean that this is the best approach to investing or even a good one.
In terms of the time frames we should be using with our investments, this always needs to be seen with a view to the performance of the investments. If we are looking to make money by owning stocks, the length of time we own a stock needs to take into account where the price is headed, because that’s the goal, to make money on these stocks by seeing their value accumulate, not just hold them and hope for this and try to close our eyes when the opposite is happening.
If markets were truly random like some academics think they are, then there would be no point in investing in anything, as the expected value of any investment would be zero regardless of the time frame.
We do know that investments do move in cycles though, where they both go up and go down, some tend to go up more than down, but there are always patterns involved, and investor behavior itself drives these patterns.
There is certainly some still involved in deciding whether to buy, hold, and sell investments, and the more skill that is employed here, the better the results will tend to be, but choosing to not use any skill at all and just leaving it all to luck cannot be the ideal approach.
Using skill does generally require individual investors to be the ultimate decider of their investments, regardless of the type of investments or strategies used, but if one seeks to achieve their potential as investors, it will take at least a bit of work on their part.
Ultimately, we need to let our investments, how they do, where they are trending, regardless of the time frame we’re using, to drive our investment decisions, and it is only then that we can claim to actually be sufficiently in control of our investment fates.