RETIREMENT INVESTING – The importance of being long sighted

2015-10-28 06:00


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Suppose that you have never flown in a plane. On your first flight you have been warned to expect turbulence and told that aeroplanes can withstand a lot more bad weather than they will ever encounter. The plane takes off, and the bumpiness begins, and your mind starts racing.

Is this normal? What’s causing it? How do I know it will end? Is something wrong? Meanwhile more experienced travellers may be calmly reclining, reading magazines or watching an in-flight movie.

Investing, for the first time, in a portfolio containing shares is like your first flight. Intellectually, you may know that there is no real need to worry about the short-term bumpiness, but that doesn’t stop you from being nervous.

Share values bounce around because they reflect the background market noise, rather than the continuing long-term trends that create wealth. The shorter the evaluation period, the more noise there is in the price and performance and the higher the probability that you will make poor quality choices that are based on the noise rather than the sound long-term investment fundamentals.

George retired recently. He subscribed to an online market update facility for his portfolio. His new hobby is sitting in front of his computer screen and watching the market, and his portfolio, in real-time.

George has a share (equity) based portfolio and the probability that he will make money over any one year period is 93% -- that is a high probability. In other words, if he looks at a statement once a year for the next 20 years he should feel the pain of loss only once or twice.

His probability of making money in any one quarter over the next 20 years is 77%. So if he looks at his portfolio quarterly he may feel the pain of loss about once a year.

His probability of making money in any one month is 67%. Looking at the portfolio monthly he is likely to feel the pain of loss four times per year. And on any given day the probability of a positive return is only 54%, which means that he is likely to feel the pain of loss over 150 times per year.

If George was glued to his computer screen every second of the day the probability of making money in any given second is only about 50,02%.

Is it possible for George to remain emotionally detached from the events unfolding on his screen in real-time? He feels every agonising second. And since the emotional pain of each loss is larger than the emotional pleasure of each gain he is likely to make decisions that he would never make if he was monitoring his portfolio once a year instead of every waking moment.

Over one year George would see roughly 0.7 parts of noise for every one part of performance. Over one month he would see roughly 2.32 points noise for every part of performance. Over one hour, 30 parts noise for every part performance, and over one second 1796 parts noise for every one part of performance.

Research shows that investors who watch their portfolios in real time usually do worse than those who check annually.

– SOURCE: HOW MUCH IS ENOUGH.

If you are approaching retirement we will do a free financial planning calculation for you (or someone you know). Contact us at 041 37 37 999 or email: vanessa.berry@consolidated.co.za

Consolidated Financial Planning (Pty) Ltd is an authorised FSP. License #12978 |

) PAUL LEONARD CFP® is an Executive Director at Consolidated, and presenter of MONEY TALK on Algoa FM for 21 years

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