Perspective: countervailing short-term and narrow thinking

When it comes to investing, we sometimes get so caught up in the short-term and in the minutiae, that we lose sight of the most important thing that stocks, as an asset class, accomplish for investors—building long-term wealth. Examples of such “short-termism” and narrow thinking are captured in questions like these: How did stock X perform relative to the rest of my portfolio so far this year? Why don’t I own X in my portfolio? Is company X facing so much competition that the company will fail? Should I sell all my underperforming stocks and buy the ones that are currently winning? Taking any actions in response to such short-termism is usually unproductive, and sometimes much worse. Most often, doing less is the best prescription for preventing short-termism from derailing your investment plan.

When such short-term and narrow thinking manifests, it can be helpful to take a step back and re-orient our thinking. The chart below is very helpful for anchoring one’s focus on the things that matter most when it comes to stock investing. Namely, the long-term. The picture below is a long-term chart of the S&P 500 Index going back to the early 1950’s. This chart includes 500 of the largest companies domiciled in the United States and represents 82% of the total value (market cap) of the US Stock market. This index has produced these returns while facing wars, recessions, energy crises, inflationary episodes, terrorism, innumerable bankruptcies and instances of fraud, not to mention declining companies losing market share.

It also has exposure to every major technological innovation produced over time. Think of the innovations: electrification, telephone, retailers, automobiles, air-travel, rocketry, computers/software, genetics, pharmaceuticals, cancer research, the internet, and now artificial intelligence and robotics. ALL OF IT and more! So, this index has captured the exceptional, the good, the bad, and the ugly. All of it. And while capturing these things it has compounded wealth at a strong rate. A “tip of the hat” to capitalism and American exceptionalism.

In our view, the S&P 500 Index should be the starting point for every investor when it comes to wealth building, but it does require a long-term investment horizon. Why? Look at the chart again. As it has gone up (compounding at about 10% a year over the entire period) there have been long spans of time where the index went down or sideways. Look at the late 1960’s to the mid-1970s. And look at the period from 1999 to 2009 (the so-called lost decade). One must have a long-term investment horizon to invest in stocks.

If the risk and return of the Index do not match the investors’ preferences, then adjustments can be made. Additional risks can be added in the form of even higher growth stock indexes, higher beta stock indexes, smaller cap indexes, and emerging market indexes. Active management strategies can be introduced to find mispriced securities with even greater growth prospects. In pursuit of these higher returns, caution should be exercised because the returns may not manifest. That’s part of investing.

Conversely, if an investor wishes to curtail the risks associated with stock investing, then risk reducing adjustments can be made. More defensively oriented stocks can be introduced (dividend growth stocks are a good example), lower beta stock indexes can be introduced, and hedged equity exposures can be introduced. Or if an investor requires more income than capital gains, high dividend yield stocks can be introduced.

The point in all this is to emphasize this idea: the capital markets are a means to an end. That end can be tailored to each individual investor’s specific needs, preferences, and circumstances. This is a portfolio engineering exercise far more than a stock picking exercise. The risk of picking stocks is that we lose sight of the bigger picture goal, which is to build wealth over time by harnessing the wealth compounding effects of broad stock ownership. Also, fixating on individual stock returns runs the risk that we lose sight of the fact that we are managing a portfolio of stocks, and the outcome that matters is the return of the portfolio and not the individual stocks that produce them. If you want exposure to almost everything, start with the S&P. Then dial up or down the risk depending on your needs. That is a far better approach than fixating on a few positions that ultimately have no or little bearing on whether your investment portfolio is meeting your needs.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.