Investing in the Moment

• April 9, 2015
• /
• Evidence-Based Investing

Living in the moment.  In life, I think it is a good thing.  But does the same hold true when it comes to investing?  I think the evidence is rather compelling that the correct answer is heck no.  Ever notice how TV news bulletins put finance next to the weather report? In each, talking heads point at charts and talk about intraday events that are quickly forgotten. Many investors feel that they are not properly informed about the financial world unless they have checked daily, or even hourly, on how the Dow has moved in the intervening period. Hey, at least it provides a bland conversation starter in fleeting social encounters, just as keeping up to date with tomorrow’s weather forecasts can fill an awkward silence. But from an investing standpoint, is it wise to “live in the moment” and act on the current news and predictions as to what will happen next? Our human instincts to focus on the day-to-day can often encourage us to make bad decisions that affect our long-term investing interests. That’s because while we live moment-to-moment, what often affects us most are imperceptible, gradual changes that occur over many years. Look at the way markets have begun in 2015, as reflected in daily news headlines from Reuters:

• January 6: Wall St. in Longest Losing Streak in 13 Months
• January 8: Wall St. Jumps for Second Day, Helped by Economic Optimism
• January 14: US Stocks Fall Heavily on Growth Concerns
• January 20: China Seen Posting Weakest Growth in 24 Years
• January 20: UK Stocks Gain on China’s Growth

As always, markets include expectations for events like this when they set prices and adjust if the outcome varies with what was expected. It is hard enough for professional investors to keep track, never mind a novice or even average investor. To use an analogy, the market news is like the weather. One day it’s sunny. The next day it rains. It’s unseasonably warm one day but cool the next. The narrower your frame of reference, the greater the apparent variability. Look at Exhibit 1 (in USD terms) below, showing monthly moves in a common barometer of the global share market. All you see are the monthly ups and downs—the regular changes in “the weather.”

Another way to look at this movement is to measure the growth of wealth overtime (see Exhibit 2). This way we are less focused on the day-to-day or month-to-month movements (the weather) and more on how wealth accumulates through time (the climate).

For a long-term investor, this is the more important measure because it takes into account cumulative gains. The media, by virtue of its publication schedule, must focus on the short-term. They need a different story every day. They thrive on investors who live in the moment.

So if we shouldn’t  live in the investing moment, what’s the right way to invest?   In my opinion, your investing experience can be much more rewarding and less stressful when you accept that there are things we cannot control – like future events – and there are things we can control – like proper diversification and investor discipline.

So I say let’s live our lives in the moment and cherish our friends and family.  When it comes to investing, let’s focus on the “climate”. Let’s remember the future is always uncertain, and consistently predicting what will happen next is impossible. The financial news will continue as they have.  We can observe it for entertainment and conversation in the moment and find comfort in the fact that we have a strategy in place that has been proven to work over time.