Investing for the long term (in a short-term world)

Many investors want to be more long term. But as we found in a recent survey of 200+ asset owners, there are numerous hurdles, with market volatility, manager performance, board pressure, and career risk at the top of the list. With that in mind, I focus this quarter on the benefits of long-termism and recommend next steps for those who want to incorporate more long-term thinking in their portfolios. The ideas I offer are based on a multifaceted research process, including interviews with Wellington portfolio managers, asset owners, and experts in the field of long-term investing, as well as a quantitative analysis of the link between long holding periods/low turnover and alpha.

Key conclusions up front

In the course of this project, I arrived at a number of conclusions:

• Short-term behavior is evident across the financial landscape, including among companies, active managers who invest in them, and asset owners who hire and fire those managers. All could do better, and lessons in long-termism from one group can often be applied to the others (e.g., asset owners might leverage tips from portfolio managers who have a long-term mindset).
• The primary benefit of being long term is in not being too short term — that is, not letting short-term pressures dictate policy and portfolio decisions.
• Cultivating an intentionally long-term perspective can also have benefits, including the ability to take advantage of opportunities others miss and pursuing strategies that can gradually compound their way to success.
• Asset owners looking for ways to be more long-term oriented should focus less on time horizon and more on developing behaviors and habits that reinforce patience and avoid overreactions to near-term events.

Defining “long term”

Before delving into the research that led to these conclusions, it’s worth considering the meaning of “long term.” We asked about 250 asset owners for their definition, and the answers varied greatly, given different starting points and policy constraints. Roughly 45% said “5 to 10 years,” just under 45% said “over 10 years,” and about 10% said “three to five years.”

Ultimately, though, I think being long term is less about a specific time horizon and more about making good decisions. Investment success can happen across a range of time horizons. Plenty of hedge funds trade very actively and achieve good results, for example. But institutional asset owners, constrained by size, structure, and governance, generally can’t run their portfolios like hedge funds. For these organizations, there is real “alpha” in creating structures and practices that allow for good decisions through a longer-term lens and help avoid falling victim to short-term pressures. With that as my premise, I next considered the advantages of being longer term, from an intuitive and a quantitative perspective.

The impact of long-termism

Intuitively, I would expect several advantages to accrue to long-term investors, including additional…