How Diminishing Investing Timeframes Change Things
If we start out investing early in our careers, when we have, say, 40 years left until retirement, and we’re saving all this money up for retirement, we may choose a strategy that has been shown to deliver good results over all these years, being long the market and sticking with our positions for instance, or investing in a basket of blue chip stocks that we feel good about.
Our plan is to contribute so much of our income a year for this, but what happens is that as the plan unfolds, the strategy we’re using may be pretty decent for a 40-year timeframe, but when this timeframe gets reduced, we get to a point where it becomes no longer valid by any reasonable measure.
If we have 20 years left to invest, and we’re using a strategy based upon holding something for 30 or 40 years, we end up with a mismatch. Sure, some of this money was invested 40 years ago, but the money we’re putting in now doesn’t. In fact, the entire amount in our investing portfolio needs to be reassessed each year as we move closer to the target, because there is no essential difference between buying something and holding it where timeframes are concerned.
As strange as this might seem to those not that familiar with how people invest, this is something that really doesn’t come up in investing circles very much. Just about everyone, including investment advisors, think that if you invest a certain amount of money for a certain time, all subsequent money put into the investment somehow has the same original window as the original money has, even though that’s just not the case at all.
We can look back in time and see markets move forward pretty reliably and pretty meaningfully when we look at most long-term periods in the past, it’s that we need to make sure that if we do want to base our strategies on these results, we actually have the time for them.
When we look at how this all plays out, we can see how this leads to a real paradox. If we can rely on 40 years with this but not 20, when we get to 20 with it, regardless of how this has performed, the strategy becomes invalid. So, this strategy is untenable because we know this when we start out and we cannot faithfully follow it because we’ll need to jump off.
Let’s say the point where our very long-term strategy doesn’t have enough time is 20 years, and this has us saving for the first 20 on a 40-year strategy, but this ends at 20, so what we needed instead is a 20-year strategy. We therefore really need a 20- year strategy initially, but when we get down to 10 years, say, we only have 10 left, and the 20 year one may not be valid over a 10-year timeframe.
Then there’s the fact that the money we contribute along the way has its own maximum horizon, the time left to retirement for instance, and there is hard to imagine how we could see this new money as having a long-term horizon when our investing horizon is not long enough. Still though, lots of people do this, and if you don’t think about this too much, you end up not questioning it much.
When we break all this down, it should be apparent that this is a task that just isn’t tenable, to look to use what are essentially arbitrary amounts of time that change with each passing year, and never really allow us to maintain any strategy based upon these timeframes. In spite of how many people try this, rather unwittingly, we’re going to need something else if we want to make sense of our investing, which we should.
What We May Do Instead
It is never a good idea, nor does it really make much sense, to ever hold investments based upon periods of time elapsing. The problem with this is that the market doesn’t work this way at all, it doesn’t care when you retire for instance and will just do what it does, which involves a lot of fluctuations and ones of some pretty long durations as well.
With all that said, the amount of time left and our strategic preferences do matter as far as what we end up doing with our money, and we do need to choose timeframes with our investments.
If we just use performance as a measure, we then need to ask ourselves how we’re going to measure this performance. A professional trader will measure this a lot differently than a long-term investor for instance. To the trader, something starting out strong and then losing momentum later in the same day or even in the same hour may be enough of a concern to exit the trade, where an investor won’t really care about intraday movements at all and will be more focused on much bigger trends such as those on weekly or monthly charts.
The degree of our involvement with our investments and our level of skill in managing them will dictate these timeframes more than anything. You cannot expect someone who works at a full- time job to also be a full-time trader, and the level of interest and skill of investors will have them naturally focused on much longer timeframes than this.
We can define these differences as the average amount of time we hold an investment, with averages being used because we’re not just imposing an arbitrary amount of time on them, we’re instead measuring their performance in the context of these general timeframes, where we’re using the intervals of our data to set.
These general timeframes can also be adjusted depending on need, and therefore when we have less time to invest, we can shorten them to suit our situation better. However, even a fairly long-term timeframe will still have us out of the investments when things turn against us enough, and the real risk of ignoring reduced timeframes is that we’re exposed to the full risk of movements against us where we may not have enough time to see them recover sufficiently.
With performance-based evaluation though, if we do indeed get that bear market we’ve been afraid off too close to retirement, once it’s underway enough to become enough of a concern, as long as our plan is aligned well enough to the market, this in itself will offer protection against getting harmed by this any more than would be reasonable.
Planning on doing nothing to the end isn’t a plan at all actually, it’s rather a complete lack of a plan. It’s like going into a bad neighborhood at night and not knowing what areas to particularly avoid or what to do if trouble starts to brew. Investors who make these mistakes are simply left with not knowing what to do, and if they actually do something, it’s usually something that ends up hurting more rather than helping, like jumping out at the bottom and watching in horror as things move back up while being too afraid to get back in.
It is said that when the dumb money is moving one way, the sharp money should do the opposite, and while that’s not always valid, it has more truth than we usually are willing to accept. People often pile on after something has gone up a lot, when something is very overbought, will be reluctant to sell when the decline is underway, and will be afraid to buy something that is very oversold and is on the rebound.
We don’t ever want to be running with the dumb money, and while we will probably never achieve a level of skill that can be considered that sharp, we can at least sharpen our skills and at least move closer to the sharp people.
Sharp investors and traders don’t just sit back and hope though, they become involved with the money that they have staked and look to be in investments that are performing well and not in ones that are not.
We of course need to set our expected holding times and make sure that they match up with our capabilities, and there’s quite a bit of variation out there among what we could select. With the right skill, any timeframe can be successfully used with success, whether we expect to hold trades for a few seconds or a few decades or anything in between.
How long we hold an investment should always be based solely on its performance though, as there are no other factors that are even relevant, provided that we don’t need to sell for personal reasons prior to the exit being indicated by the performance itself.
On the other hand, all the dead money in the market so to speak does serve its ultimate purpose, as if everyone timed their investors as faithfully as professional traders do, the amount of volatility in the market would increase massively and the pros would eat the lunch of the common people much more than they already do. Investing would be made much more difficult for the ordinary investor, not unlike how investing in cryptocurrencies has become, and even with the crazy amount of volatility that we’ve seen with these cryptocurrencies, it would be higher if not for all the folks who hold their positions far too long.
While timeframes may seem to be irrelevant to investing, and in terms of just choosing a certain amount of time to hold something, this is pretty irrelevant indeed to the investment, we still need to be thinking about how much time we should be staying in trades generally, and then let the market ultimately decided when we enter and exit them within this broader context.