One of the most important rules of successful investing is to focus on the long term. Arguably, it’s also the rule that investors ignore most often. As Mark Hebner writes in Step 9 his book Index Funds: The 12-Step Recovery Program for Active Investors: “Most investors don’t make decisions based on long-term history… They generally look at the most recent one-, three- ,five-, and sometimes ten-year returns and assume that recent past performance will be an indicator of future returns.”
It’s not just ordinary investors who make this mistake. Institutional investors, who are supposed to be more sophisticated than the rest of us, are far too fixated on short-term data. In fact, financial professionals, who should know better than most that it pays to think long-term, are perhaps more focused on the short term than anyone. Why? Because they’re financially incentivized to produce results over short periods of time.
The problem is that, because the financial markets are generally very efficient, short-term investment outcomes are essentially driven by random news. Yes, long-term historical data can be very useful, but most investors need to revise their view on what long-term actually means. The standard timeframes for evaluating past performance are far too short to allow us to draw anything like firm conclusions about what the future prospects are for a particular fund, asset class or investment strategy.
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