Lengthening the Investment Time Horizon
From: MFS White Paper
- Investors are increasingly short term in their orientation, even while demographic trends point to longer life expectancy and the need for larger pools of retirement funds.
- Various reasons have been posited for this short-term view; they include the role of incentives, media and financial reporting and numerous decision-making biases identified by behavioral researchers.
- An arbitrage opportunity exists for managers with a longer investment horizon: There are more opportunities for differentiated performance when one holds securities for longer time periods.
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.
– John Maynard Keynes
One wonders what Keynes would make of the investment environment today given the short-term view that characterizes so much of both individual and institutional investor behavior. We now live in a world in which people are living longer and in need of retirement funds with a longer shelf-life, and yet, paradoxically, investors are typically more short-term in their focus than ever.
A review of the data clearly reveals the short-term nature of much investment behavior today. Stocks are being held for record-short periods of time, and professional investment managers are generally also taking a short-term view in their management of assets. Wall Street’s research coverage is focused on near-term corporate earnings rather than on sustainable earnings growth over the medium term. Moreover, markets have a tendency to overreact to short-term events, particularly missed quarterly earnings estimates, and this fosters the quarterly earnings frenzy.
The financial media is paid to manufacture market noise and has become an over-revved engine in constant need of fuel. In addition, the structure of compensation incentives in the investment management industry further encourages the short-term focus; a surprisingly large number of investment professionals have less than half of their compensation based on longer-term performance measures.