Long-Term Investors Shouldn't Focus on Short-Term Volatility

I have a great e-mail that I receive each morning - produced by the CFA Institute (you can sign up for it here) - that summarizes all of the pertinent news of the morning, and it also includes important articles that pertain to analysts, money managers, and other financial professionals.  This morning, I noticed one article that made me think twice:

Advisers shouldn't focus on short-term volatility for long-term investors
"When their clients' investment objective is long-term growth, financial advisers aren't helping them by frequently drawing their attention to short-term volatility, according to research on behavioral finance.  A research paper by Shlomo Benartzi and Richard H. Thaler suggests that investors are more sensitive to losses than gains.  Giving too much attention to volatility can lead investors to give up opportunites for gains." - AdvisorOne.com  (Read the full article here.)

Of course, after spending 42 years watching and communicating with long-term investors, that message is not a new one, but the research paper confirms what we've seen time after time after time.  This MUST be integrated with what one of my idols John Templeton described in a famous quote about bull and bear markets: "Bull markets are born from pessimism, grow on skepticism, mature on optimism, and die on euphoria." 

I agree that today's long-term investors are more sensitive to losses than gains, but I'm not that sure about ALL times.  In the euphoric times that Mr. Templeton mentions (i.e. 1999-2000), I'm pretty sure that long-term investors did not even recognize that there was such a thing as losses.  Yet, in a total reversal, today's investors don't acknowledge gains, but instead, they are continuously balking and paralyzed at the thought of losses, and their total view is based on the healines of today (short-term fear). 

So, I think that it's very important for us to take Benartzi and Thaler's research and theme very serious today.  And as you can see above, our Asset Allocation Model continues to suggest that the long-term opportunity is in equities.

Click here to read today's complete Market Comment.

Don Hays

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