Looking back has been in vogue recently. With the new year bringing a new decade, the turn of the calendar has sparked a flood of recollection. You can easily find discussions of the best movies of the decade, the top mutual fund managers of the decade, and much more. Meanwhile, some observers have gone in the other direction, offering predictions for the 2010s.
Whatever the value of finding out--as one example--which songs a particular blogger considers memorable, for investors this trend has a positive side. For at least a brief time, public attention has been drawn away from the next day's inventory report and next quarter's earnings and refocused on a meaningful period of time.
It may be heretical, therefore, to note that in an investment sense, 10 years is not an eternity. Yes, as an alternative to the all-too-common focus on one-year returns or other short stretches, a 10-year measure provides welcome perspective. It's apt to cover more than one market cycle and a variety of macroeconomic environments. We here at Morningstar often cite that period for such reasons. But for an individual investor, there are benefits to thinking far beyond a mere decade. How about 30 or 40 years?
Science-fiction territory
It's understandable why most people don't peer decades into the future.
For a 22-year-old just graduating from university, even turning 30 seems
eons away. For new parents, the main challenge consists simply of
getting the baby to stop wailing. And for others, the idea of a 30- or
40-year time horizon is more likely to conjure up thoughts of aching
joints than of happy investment returns.
Even when people do turn their attention to the distant future, they're not likely to expect to own the same investments they hold today. After all, by the year 2052, say, an asteroid could have struck the earth, and the handful of us remaining alive will be wandering around a scarred landscape in ragged clothes and carrying battered grenade launchers. At least, that's what you learn at the cinema.
In fact, it's not uncommon for people to own the same fund (or stock) for decades. And if one has the good fortune to enjoy an average life span or more, an investment horizon could last as long as 50 or 60 years. That doesn't mean investors should ignore prudent allocation advice; short- or medium-term goals deserve appropriately low-risk investments, and reallocations over time make sense. A stock-fund allocation that was appropriate at age 35 probably isn't at 75. But that 75-year-old might still own some stock funds. And the bond funds that will dominate his or her portfolio at that stage could be the same ones bought nearly half a century earlier. For long-term money that's not specifically targeted for a house or education, consider letting your thoughts stretch way, way out.
By including distant years right in their names, target-date funds have helped steer investors towards such a mind-set. But target-date funds are hardly the only option for true long-term investing. The important thing is to recognise just how lengthy the long term really is. Thinking of your investment horizon as a very long arc has a number of benefits.
The power of dividends
With a limited investment horizon, the idea of getting a 2% or 3%
dividend yield from a stock or stock fund may not have much impact. But
as the time period under consideration lengthens, the compounded numbers
add up. Over 30 years or more, the difference between even a modest
dividend and none can no longer be ignored. It doesn't make a lousy
stock or fund worth buying, and dividend levels aren't set in stone. But
extending your time frame helps magnify the power of dividends.
Helps you relax
Suffering through downturns can be hard on all but the most hardened
investment veteran. If a reversal extends to a year or more, the idea of
shifting all your money into short-term CDs or ultrashort bonds can be
tempting, even if you know--in vague terms--that you have time to
recover. But if you've truly absorbed that your investment horizon
extends many decades, it's easier to accept that a one-year downturn
likely isn't the catastrophe it feels like at the time.
Encourages deeper consideration of adviser's qualities
If you think you might own a fund for 30 years or more, you'll pay close
attention to the source. After all, it's not likely that the same
individual will be running it when we pass this century's midpoint. Of
course, you can sell a fund if the manager changes and the replacement
doesn't impress you. But it would be easier--and cause fewer tax
issues--if you could continue holding the same funds for your long-term
goals. Owning a portfolio managed by a reliable, shareholder-friendly
advisery firm that keeps its focus on investing rather than marketing
increases the likelihood that the fund will still be a keeper many years
down the road.
Boosts your attention to cost
It can be easy to ignore high fund costs for a couple of years,
especially when a fund is pumping out juicy returns during a strong
rally. But if you think you'll be paying that steep fee year-in and
year-out until 2050 or so, you might think twice. That's a good thing.
Reduces the temptation to capture short-term trends
If a decade is your definition of long term, it might be tempting to
shift money around in an effort to take advantage of what seems likely
to outperform in the next couple of years. That's 20% of your time
frame. But with an extended time horizon in mind, such tactics won't
seem worth the effort. You might feel confident in your ability to
forecast the next few trends, but how about your skill at predicting
such patterns consistently well over three decades or more? Just the
thought of it is exhausting. Anything that steers investors away from a
strategy of rapid, trend-seeking moves is welcome.
Conclusion
Taking a truly long-term perspective does not mean you must own the same
funds forever. Of course you should make adjustments if your personal
circumstances change or if the funds change.
And, to repeat, the advice to extend your investment horizon to several decades applies only to money that has been relegated to the long-term category and also doesn't have a specific end-date such as the time a current 5-year-old will enter university.
So, let your investment thoughts wander well down the road. And, just in case, stock up on sturdy clothes. If that Hollywood-style apocalypse does occur, times will be tough, but there's no reason we should have to wear rags.
