Most investors consider themselves to be in it for the long term, but their focus and overreliance on the quantitative metrics of investment performance suggests the theory may not be living up to the practice.
The Focusing Capital on the Long Term (FCLT) initiative sees long-term investing as a frame of mind rather than a holding period. Warren Buffett has claimed that his “favourite holding period is forever.” Excluding speculators, most investors agree that you need to be in an investment for the long haul rather than flipping in and out of investments in a bid to capitalise short-term gains. So why is it that whenever there is a bout of severe volatility, investors panic or at least get so unnerved?
Much has to do with a fixation on quantitative measures pinned to investment risks rather than opportunities. “They tend to be more downside orientated because our behaviour tends to focus on and remember negative surprises more than surprises on the upside,” said Mercer Investment Consultant Hendrie Koster.
Koster says that “while it would be nice to be able to quantify all risks, everything cannot be quantified, especially when it comes to the long-term trends and risk factors becoming apparent in this second decade of the 21st century.”
Mercer is encouraging investors to broaden their traditional perspective on risk by taking some time to look up and away from their computers quantifying and modelling financial risks. “We’re saying that investors need to be wary of a potential blind spot to important real-world trends, such as climate change and technological advances. They can’t just be focused on their computer screens because some critical trends are really not captured in the risk models depicted there. Stand up, look away from the monitor and out to the real world to understand some of the major secular trends taking place around us now that will inevitably shape the investment landscape over the coming years and decades,” Koster said.
Bill Gates has been quoted as saying that we “always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” Here are the top 10 risks according to this year’s World Economic Forum Global Risks Report. What are we underestimating?