October 28, 2013

Thirty seconds can make all the difference — but shouldn't

by Michael Roberge, President & Chief Investment Officer

Many people today walk around with more computing power in their pockets than the computers that ran NASA's missions to the moon. Headlines whiz past us all day long. Financial information of all sorts has never been more accessible.

This cutting edge technology and real-time access to information gives us the ability to react to market-moving events in a matter of seconds. But should we?

There is a strong argument to be made that we should say "so what" and do nothing when the latest financial news scrolls across the screen, especially if we are thinking long term. But this can be hard for many investors.

The average holding period for a stock on the New York Stock Exchange is 1.67 years, down from 10-plus years in the 1970s and 5-plus years in the mid-1990s.*

On the other hand, pension plans often have liabilities that extend beyond 30 years. A sovereign wealth fund's investment horizon is perpetual. Do these institutional investors react to market swings on a daily basis? Perhaps on the margin, but with investment strategies that are designed to meet objectives that are measured in decades, the day-to-day gyrations of markets are mere noise to them.

Now consider investors saving for retirements that are 10, 20 or 30 years out — time horizons similar to that of a pension plan. On a day when there is market volatility, are individual investors considering their investment liabilities over the next 30 years, or are they glued to the market app on their mobile devices and tempted to make rash decisions. In just seconds, investors have the means and opportunity, driven in many cases by a fear of losses, to make financial decisions based on 30 seconds of information that can impact the next 30 years of their financial lives. Should a headline be able to alter a 30-year plan?

Preventing and changing the short-term mindset, in spite of all the tools and information at our fingertips, might just be the single greatest challenge financial advisors and their clients face today.

MFS has several tools and resources for financial advisors and their clients to help move the mindset from 30 seconds to 30 years: *Source: Ned Davis Research. Data as of 12/31/12.