Letters To Our Children #8: Keep Your Eye on the Horizon

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We wrote before about your three investment buckets, each with a different time horizon. Here is why that is so crucial.

Business founder Jeff Bezos highlighted the key thing about time horizons.
“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns. This is good for your short-term bucket, but may hamper you anywhere else.

Behavioral economists have a theory that the preference for stability is very strong, part of human nature. If the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may prove to be large since fewer are willing to do it. This is based on our opinion, no guarantees!

Bottom line: we believe in investing for the long term with your long term money, and leaving short term strategies to your short term bucket. It pays to understand volatility, and its role in your investment returns. No matter what, you should be able to live with your chosen strategy, even when (especially when?) it is uncomfortable.

Clients, if you have questions about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.