MDNews - Minnesota

THIS IS THE SECOND ARTICLE IN A TWO-PART SERIES DEALING WITH CONTRIBUTING FACTORS TO INVESTMENT FAILURE, WHICH HIGH NET WORTH INVESTORS OFTEN FACE. THIS MONTH, WE'LL TAKE A LOOK AT A SECOND MAJOR CONTRIBUTOR TO INVESTMENT FAILURE: TIME — OR MORE ACCURATELY, OUR MISPERCEPTION OF IT. WHILE MOST INVESTORS BELIEVE THEY INVEST WITH A LONG-TERM INVESTMENT PERSPECTIVE IN MIND, IN REALITY, THEY TEND TO REACT TO SHORT-TERM MARKET SWINGS THAT OFTEN DERAIL LONGER-TERM OBJECTIVES. Overcoming Investment Failure for High Net Worth Individuals: A Healthy Perspective on Time By Bill Strand, Founder and Principal of Paradigm: Strategies in Wealth Management ++++++++++++++++++++++++++++++ + +++ + +++ ++++++++++++++++++++++++++++++ WEALTH MANAGEMENT ❯ Diagnosing the Issue: An Unhealthy Focus on the Short-Term Last fall, State Street's Center for Applied Research published the results of a two-year study that examined what true investment success looks like. The study, entitled "The Folklore of Finance," found that the way investors make investment decisions is so flawed that achieving both high returns and long-term objectives was nearly impos- sible. According to the study, 73 percent of surveyed investors said they were investing with long-term goals in mind, though only 12 percent reported feeling confident that they were prepared to meet those goals. In addition, just 29 percent of investors defined success as reaching their long-term goals. Most (63 percent) preferred to define suc- cess using short-term markers, such as comparing their portfolio's return to that of a benchmark or even to their neighbor's portfolio. Take, for example, typical return markers like one-, three-, and five-year data popular with so many mutual fund companies. These short time frames are hardly representative of the span between one's first job and retirement. The evidence is pretty clear; while inves- tors want to believe they are investing for the long-term, they continue to react to short-term swings that actually derail their planning. Part of the problem is the financial industry's unhealthy focus on the short- term. The short-term dominates the industry because it is easier to measure and incentivize. Institutional investors — primarily large endowments and pension funds — typically use a period of one to three years to evaluate the performance of their providers. As a result, almost 60 percent of investment providers use the same short-term time frame to judge the performance of their managers. But institutional investors aren't the only ones who rely on short-term data. More than 60 percent of individual investors surveyed in the "Folklore of Finance" indicated they would at least consider moving to a more conserva- tive strategy if they saw a decline of 20 percent or more in a given year — and 90 percent of those same investors said they would make a change in less than three months. I tend to see this problem either as an advisor's misunderstanding of an investor's risk tolerance, or the investor not understanding his or her own risk tolerance. Investors often don't fully understand how much risk they are taking with their investments until market conditions force them to realize the impact of how they have allocated their money. Generally, this happens as fear sets in when the markets are most turbulent. Investors have a difficult time accepting that risk in the financial world is typically defined as volatility. They tend to understand that taking on greater risk can lead to greater reward, 1 4 | Minnesota MD NEWS ■ M D N E W S . CO M

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