Why short-termism can be very expensive?

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Robin Powell
Joachim Klement/ Liberum Capital

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RP: One of the core principles of successful investing is to keep a long-term focus.

It sounds easy, but in practice, it’s actually extremely hard.

And as, financial author and consultant Joachim Klement explains, short-termism can be very expensive.

JK: Studies have shown that just because people trade too much in their stock portfolios or in their investments with funds - because in the 21st century, it’s not just about trading stocks, nowadays it’s also about trading ETFs which you can now buy and sell on a daily basis or even within a day.

That costs you easily three to five percentage points per year of your performance. So in a world where equities probably aren’t that great any more for long term returns and don’t make ten per cent but maybe six or seven per cent, if you lose three to five per cent, and then on top of that have to pay all the fees and commissions and everything, you pretty quickly wipe out all of your profits from your equity investments.

RP: Why is it, then, that investors find it so hard to think long term?

The reason has to do with the way that human beings have evolved.

JK: Evolution has created us in such a way that we have a very good instinct for danger and for opportunity. Otherwise, we couldn’t have survived in the wild. However, the problem is with investments, there’s a lot of danger and opportunity all the time everywhere, so we constantly get flooded with these kind of triggers where we start to feel afraid or where we start to feel greedy.

And as humans, we are built to react intensively and strongly to these kind of emotions, much more so than what is going on in our brains when we logically think about these things.

RP: The challenge, then, is to control your emotions and stay calm — especially when those around you are acting in an irrational way.

JK: Some people are really good at that because there are techniques like meditation, mindfulness, etc. etc., which are becoming more popular also amongst professional investors because it helps you ground yourself, stay calm in a volatile market, stay calm in a crisis.

But, meditation isn’t for everybody, and a good adviser, whether that’s your financial adviser or a trusted person in your family who has experience as an investor can actually help you maneuver your way through the ups and downs of markets, and literally help you stay calm, calm you down actively. Like a doctor would after you have a panic attack, or a nurse would if you have a panic attack, similarly, if you are getting afraid about markets, that is like a panic attack, and your financial adviser is like a doctor for your wealth, or for your money.

RP: So, if you’re one of those people who struggle when the pressure’s on, consider hiring a financial adviser.

Yes, it will cost you. But not having an adviser could prove far costlier.

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This video is intended to provide general information only, and it should not be construed as an offer of specifically tailored individualised advice.