Looking Long

What does it mean to invest long-term?

Well, let’s think about it like a baseball team. There are 162 games in a major league season. About six games a week for six months. It’s a grind. It’s easy to burn out quickly if you don’t pace yourself—your energy and your emotions.

One of the most prized resources for every team is an ace starting pitcher. A great pitcher can dominate a game. They have the ball in their hands on every “play.”

One of the most prized resources for every team is an ace starting pitcher.

But, to throw a ball 95 to 100 MPH causes a lot of wear and tear on the arm. So, pitchers need to maintain a great routine to alleviate as much of the stress as possible. And, managers need to have a good plan for not overusing a pitcher. If the pitcher throws too much over too short a timeframe, they may run an increased risk of major injury.

So, the manager is constantly evaluating how much to use a star pitcher to help win today’s game without taking undo risk the pitcher’s future is shortened due to injury. They’re trying to optimize performance.

And, the same holds true for the investor. Thinking long-term sometimes requires you to forgo some performance in the near-term so that you don’t make a catastrophic mistake that shortens your investing life.

And, the same holds true for the investor.

Here are four keys for better long-term investing:

Focus on your goals. This is easier said than done. If you have a goal of driving 500 miles in the next 10 hours, you know you need to average 50 miles per hour. If you’re driving 65, you’re ahead of the game. You may have opportunities to dial back your speed. But if you’ve been sitting in a traffic jam, going nowhere for the last 2 hours, you’re going to have to pick up the pace to achieve your goal.

This is no different than how an investor should approach a long-term goal. You’re constantly evaluating your pace and whether you need to pick up your speed or potentially reduce it.

This is no different than how an investor should approach a long-term goal.

Buy quality, diversified assets. One of the easiest ways to derail your long-term goals is by chasing shiny objects. The market seems to routinely showcase hot new investments that garner widespread enthusiasm. You may feel like a bum if you’re not invested in the latest market fad. But if the fundamentals of those investments are not great, you may be setting yourself up for massive damage financially. This seems like a no-brainer, but I can’t tell you how many times I’ve heard emotions get the best of people and they start chasing the shiny object they swore they would never chase.

Pay attention to pricing. I wrote an entire piece on pricing a few months ago. The basic concept here is to understand how much you’re paying for each dollar of earnings. Evaluate how much that is relative to what investors have paid in the past for the same investment. Evaluate it also relative to the market as a whole.

For example, let’s say you’re in the market for the new pickup truck that’s usually priced at $50,000. But, for some strange quirk, the truck is now going for $100,000. If you bought the truck, believing there’s no risk, that if you don’t like it, you’ll be able to sell it close to $100,000, you may be setting yourself up for a rude awakening once that quirk is resolved.

For example, let’s say you’re in the market for the new pickup truck that’s usually priced at $50,000.

In the market, one way you make this evaluation is looking at a stock’s price-to-earnings ratio. If the stock is usually priced at 10 times its earnings, but now is priced at 30 times, you may be taking on substantially more risk.

Maintain a level head. The markets in the short-term will give you all kinds of reasons to get super excited and super scared. They’ll take your emotions on a wild ride if you let them. But, over the long-term, the U.S. stock market has historically rewarded investors, compounding capital at a rate far above inflation.

In the past month, we’ve seen fluctuations return to the market. That volatility may heighten your short-term focus as you watch the numbers bounce up and down on the screen and in your portfolio. In these moments, focus on the keys to creating long-term wealth.

In the past month, we’ve seen fluctuations return to the market.

In short, become the ace pitcher who optimized his performance to become a hall-of-famer.

If you need help, reach out.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

This material is provided as a courtesy and for educational purposes only.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.