Investment self help
Many people start their new year with diets, exercise, or perhaps a dose of self-help. Bookshops are well stocked with guides to better working, living, thinking, sleeping and even breathing.
How about better multiple time-horizon investing?
A recent paper* by Focusing Capital on the Long Term (FCLT) injects a dose of self help into the long-horizon investing discussion. It recognises that few investors can focus solely on the long term, and shorter time horizons exist in parallel.
Even large institutional investors can have collective behavioural biases around long-term investing. They may be subject to short-term pressures that make sticking to long-term decisions difficult.
FCLT’s CEO Sarah Williamson recalls a US church investor who claimed to have an investment horizon of 2,000 years. While such claims might be tenuous, many investors do have a genuine multi-decade investment perspective.
Yet the crux of FCLT’s argument is that a long-term investment consists of a series of short-term horizons, over which investments may be required to make a positive return for less tangible reasons.
“How can the ‘baton’ of long-term investment culture be passed down effectively?”
Boards may be subject to biases in the way they relate to executive management in executing policy and perceiving the success of that policy over time. Pressure to sell might trump the better long-term outcome of holding an investment for a longer timeframe or to maturity.
Drivers to this may be as simple as herd behaviour or a perceived need to ‘do the right thing’. Few staff or board members can expect to be in place over multiple decades. How do they ensure that the ‘baton’ of long-term investment culture is passed down effectively?
FCLT also explores risk metrics and the disadvantages of measures like value-at-risk (VaR) have been widely discussed. Sometimes the way information is presented can inform decision-making and guide better outcomes. A simple example is to put long-term performance numbers ahead of short-term figures in tables.
A factor the paper does not cover is regulation. Yet regulation is a key driver of short-term and procyclical behaviour. The extent to which investors can influence this is worth investigation.
As the world approaches a possible downturn in 2019 following months of volatility, FCLT’s paper arrives at a key juncture. Rebalancing discipline comes to the fore as a means to ensure counter-cyclical behaviour – buying troughs as well as selling peaks. Have investors put in place automatic rebalancing strictures or could subjective decisions prevail? How will pension funds shape up, and will they put their money where their mouth is when it comes to acting in the long-term interest of beneficiaries?
*Balancing Act: Managing Risk across Multiple Time Horizons
Liam Kennedy, Editor