The Long-Term Investing Fallacy

The financial services industry likes to preach the benefits of compounding returns and long-term investing. Have they overstated or even misstated their cause?

It’s common for industry types to illustrate unrealistic long-term time horizons of 100 or 200 years of equity returns (NYSEARCA:DIA) to prove that we should be long-term investors. The problem with this argument is that it’s completely irrelevant to you and me. Our present life span’s aren’t 100 or 200 years and neither is our investment time horizon.  (I call this type of apples-to-oranges analysis the “Jeremy Siegel Syndrome.”)

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Another common habit is to categorize all investors – regardless of their age, risk tolerance, or needs – into one big group and to lecture them to be “long-term investors” as if it’s the solution to what ails their money. This type of negligent advice is tantamount to financial malpractice!

“Illustrating a 100 or 200-year investment time horizon is an irrelevant reference point for the investing public.”

The simple fact is people above age of 50, 60, and 70 do not have the same investment time horizon as people that are 20, 30, and 40 years old. Most people at or near retirement do in fact have a much shorter investment time horizon and a higher need for investment income and portfolio liquidity. Moreover, older people have less time to recover from a significant market decline compared to younger people.

Here’s another uncomfortable truth: Wall Street’s unsatisfactory investment performance is often shrouded behind its long-term investing pitch. For example, if you have a portfolio or funds with lousy performance, give it a few more years to get better, is how many investment customers have been brainwashed to think.

Bottom line: Long-term investing in stocks (NYSEARCA:VT), bonds (NYSEARCA:BOND), real estate (NYSEARCA:VNQI) or whatever else is not the panacea for a misaligned investment portfolio. And telling a person whose portfolio is poorly constructed or getting clobbered to “be a long-term investor” and “not to panic” is brave advice but not necessarily the right advice. Staying the course won’t fix portfolios that are ignorant about cost, taxes, risk, and diversification.

I wish long-term investing could fix crazy people with self-destructive habits and architecturally unsound portfolios. But it won’t.

Ron DeLegge is the Founder and Chief Portfolio Strategist at ETFguide. He’s inventor of the Portfolio Report Card which helps people to identify the strengths and weaknesses of their investment account, IRA, and 401(k) plan.

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3 comments on “The Long-Term Investing Fallacy
  1. Sam Birnbaum says:

    Full disclosure: I have worked at the sell side for over 20 years. While I am no longer employed there or elsewhere, I will reply and attempt to set the record straight when I feel that comments made are not entirely factual. While there are unscrupulous brokers, as there are in any profession, the overriding tenant (as required by law) is to know your client. The reason you have target funds available in the market is precisely because they are pitched and sold to those that approach an age where they become appropriate.

  2. Ronald Delegge says:

    Sam, I appreciate your comments although I don’t share your view.

    The financial services industry’s bias toward long-term investing as the panacea to the problems that face an individual investor is wrong and misleading. My article’s main point is that NO TIME FRAME – even a long one – is necessarily beneficial to an investor with a misaligned or poorly constructed investment portfolio. To say a 30, 40, or 50-year time horizon will miraculously fix a broken portfolio is naive.

    What is a “poorly constructed” portfolio? I’ve outlined the criteria in my Portfolio Report Card methodology, which helps individual investors to understand this in a very easy way.

    Finally, I especially disagree that target-date funds (TDFs) are at all “properly suited” to people in a certain age group. As you know, age is only one of multiple factors in determining whether a certain asset mix is compatible with a person’s investment goals, liquidity requirements, etc. Taking people’s random ages and jamming them into a TDF is fairyland investing. The default investment choice should always be a customized asset mix that perfectly matches an individual’s risk tolerance and financial objective vs. canned off-the-shelf one-size fits all investment products.

    TDF’s are a great solution for kids with less than $2,000 just starting out and little financially at stake – but that’s not how they’re being sold or used.

  3. Sam Birnbaum says:

    Ron,

    As I said in my comment “the overriding tenant (as required by law) is to know your client.”.
    I also said they are pitched to those of a certain age. It is the combination of the two that one has to take into account. The constituency of the portfolio should then be appropriate for the individuals that they are pitched to. Any portfolio should be rebalanced as often as it is appropriate taking into account transaction costs versus realized returns.

    Regards,

    Sam

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