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Beware the perils of short-term investing!

Young female analyst working at her desk in the office

Looking around the financial headlines, I see day-by-day, even hour-by-hour, updates on minute details of the stock market’s ups and downs. That kind of approach highlights to me the perils of short-term investing.

The media is often hung up on short-term share price movements, failing to see that they often don’t represent the underlying performances of the companies themselves.

That old Greek chap Plato once envisaged humans living in a cave, only seeing the shadows cast on the walls by the events of the real world outside. Share prices are like that, just shadows of what’s really happening. Plato would have understood investing psychology.

Short-termism

Johnny Minter, Investment Communications Consultant at St. James’s Place, is on the same wavelength as we are at The Motley Fool. I’ve just read an article he wrote, looking at short-term investing.

He says: “During a period of economic uncertainly, high inflation and market volatility, it’s hard not to fixate on immediate needs, at the expense of working towards long-term goals. As a result, we can all be guilty of short-termism“.

I think there’s a key bit of insight there. It’s easy to mock the short-term focus of many in the investing business — I know, I do it all the time.

Tough times

But when it comes to us as individuals, we’re all human. And it can be hard to stick to a decades-long investing plan when we’re worried how we’re going to pay today’s bills.

So when daily life becomes more short-term in its horizons, there’s a natural tendency to think that way in everything we do.

I can still remember something a private investor once said to me many years ago. We were in some sort of market crash. I forget which one. He pronounced, quite earnestly: “Your long-term investing approach isn’t much use in times like this, is it?

To this day, I still struggle to think how I should have answered that.

Strategy

So what is the answer? I’ll pick another comment from Minter, which I think sums it up well:

To stay on track, keep in mind the timeless, golden rules of investing.

This means thinking in decades not days, with a goal or plan to guide us – and acknowledging that there will always be times when markets are more volatile. It also means avoiding changing a long-term strategy because of a short-term correction.

That last sentence is key. Since the pandemic, a number of people have questioned my commitment to investing in shares. “But look at the crash,” they’ll say, “what are you going to do about that?

No change

My answer is… I’m doing same as usual. I’ll carrying on investing my spare cash in shares, with a view to not taking it out for at least a decade. It’s going into shares that pay dividends, and I’ll reinvest my dividends in new shares.

A short-term downturn is probably the worst time of all to change strategy. Times when shares are cheap are the best times to buy them for the long term, aren’t they?

The post Beware the perils of short-term investing! appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.