Dec 3rd, 2007
The short view and the not-as-short-but-still-too-short view
Yes, November was a rough month for the stock market (I tried to think of other adjectives to use but it just was the one that fit the best). In that month, the total stock market index (not the Dow Jones Industrial Average, not the Standard & Poors 500, not the NASDAQ, but the Dow Jones Wilshire 5000, which tracks the total stock market index) dipped 4.725%. For me, personally, my main retirement account, which is comprised of a total stock market index fund, a total bond market index fund, and an international stock fund, ended the month down 3.485%, just a slight bit better.
These kind of figures are often enough to shake up those investors who take the short view–those who follow the stock market very closely and make decisions on whether to buy or sell based on what happens day to day. And who wants their retirement portfolios to fall in value?
There are, however, many problems with taking the short view. We’ll look at lots of these in coming entries, but for now, let’s just look at the issues with making the short view the predominant view in how you look at your investments.
If instead of looking at that one month loss, I look at my one year performance, that same portfolio gained 9.5%; over three years, it also gained, averaging 11.9% per year; and over five years, it also gained, averaging 13% per year. The total stock market index has a one, three, and five year performance of 5.8%, 9.7%, and 13.8% over that same period of time.
The point to be made is this: one month does not make a portfolio, and neither does one year. It takes several years to truly gauge a portfolio’s performance, and to make changes based on the short view can truly hurt in the long view. In the long view, there are rough months, but this is just one month out of a long string of them–over 5 years, one bad month is less than 2% of the time elapsed. I’m likely to have lots of months better than this one in 5 years, and even though I may have a few rough months as well, history tells me it’s much more likely I’ll have more smooth ones than rough ones.
Did the recent rough month in the stock market make you consider ditching some of your holdings? If so, the short view impacted you; the question is if it impacted you enough to cause you to sell. For me, the short view bothered me, but I decided a long time ago I’d be sitting tight for awhile, so that’s what I did and that’s what I’ll continue to do for quite a bit longer.
What’s your short view and your long view?
