What type of investor are you? Do you think long-term, or do you think short-term? The difference can mean the type of risk you undertake in your investments and the type of returns you can expect.
What’s the difference between short-term and long-term investors? Short-term investors covet liquidity and like to move in and out of investments like stocks to profit from timing – buying a stock before an upturn and cashing out before a downturn. Investing short-term is speculative, and most investors are unsuccessful at it. Over 90% of professionals fail to beat the market consistently.
Short-term investors tend to be speculative and hang on every word uttered on social media, cable news, and the internet for news they perceive would give them an edge over everyone else. They’re susceptible to hype and drawn to shiny objects and the next big thing. They’re constantly looking for that home run that rarely ever comes.
Consider the difference between short-term and long-term investors in a stock like Amazon. Amazon has demonstrated spurts of volatility that short-term investors have tried to take advantage of to profit from the upswings and downswings. If they’re like most retail investors who invest this way, they will underperform the market. The long-term investor, on the other hand, is a different story. If you had invested $100 in Amazon stock (AMZN) on the day of its IPO on May 15, 1997, and held on to your shares through the end of 2022, your investment would have been worth approximately $1,636,364.
The Amazon example demonstrates the risks and returns you can expect from short-term and long-term strategies. Investing short-term is risky, and the returns are average or below average. That’s because gains are balanced out by losses when making multiple trades. In the case of long-term investors, investing in the right asset – in this case, Amazon – allows the company to mature and grow along with your investment. Not all IPOs work out like Amazon, but investing long-term is usually the less risky and more profitable strategy.
As I mentioned, long-term investment in Amazon happened to work out because, in hindsight, things worked out for Amazon. With new IPOs, it’s a crap shoot. For every Amazon, there are ten Ubers or pets.com’s. But what if you could invest in an asset where you could predict its long-term viability? That would be the best of both worlds, and that’s why smart investors allocate to certain assets they can rely on to perform long-term to profit long-term and mitigate risk.
Here’s why:
When investing long-term, savvy investors focus on time, not timing. The average investor – the short-term focused investor – is locked on timing because that’s what they’ve been conditioned to believe is the only way to make money from investing. They’re taught to latch onto the next big thing, buy low, and sell high.
The timing doesn’t work. Some investors get lucky occasionally, but nobody gets lucky all the time, which is why the average investor underperforms the market. How often have you heard someone say, “If only I had bought it sooner?” “If only I had held onto it longer.” “If only I had sold sooner.” Regret is a regular emotion experienced by short-term investors.
While short-term investors are focused on timing, long-term investors are more interested in time. To them, the key to wealth is time, not timing. Like long-term Amazon investors who were patient enough to see the company through its growing pains, long-term investors are willing to see their investments through. The most reliable assets they prefer are tangible cash-flowing assets like real assets and income-producing businesses.
With these types of assets, smart investors can leverage time to take advantage of two key investment objectives:
- Cash Flow.
- Appreciation.
By leveraging time, passive cash flow from tangible assets like real assets and productive businesses can be reinvested to augment current income streams or create additional streams to compound wealth. Tangible assets also reliably appreciate over time because they have intrinsic value – value separate from what people are willing to pay for them – to add another dimension of returns.
Long-term investors let their assets do their magic with long lockup windows. Long-term investments take emotions out of the equation by taking the crowds out of the mix through illiquidity. By investing in assets with a track record of success and taking their hands off the wheel, long-term investors let their investments grow and mature to provide the types of returns the ultra-wealthy have enjoyed throughout history to grow and maintain multigenerational wealth.
With long-term investments, there is never second guessing like there is with timing. Investors locked in for a minimum of 3-5 years have no choice but to trust the process. Instead of experiencing the common emotion of regret from timing and volatility, investors focused on time experience the calm of knowing their assets will perform and that their wealth will compound and grow over time.
Investors locked into a tangible asset like commercial real estate that will certainly appreciate over 5, 7, or 10 years don’t have to wonder about the timing. When the investment runs its course, and it’s time to cash out, almost assuredly, the commercial real asset will sell for more than it was acquired for a while, cash flowing in all the intervening years.
What type of investor are you?
What type of investor do you want to be?
Do you prefer to gamble and roll the dice on short-term investments, or do you want to reap the above-market returns from long-term cash-flowing tangible assets insulated from market volatility?
The difference can mean more risk and below-average returns on the one hand and above-market returns and below-average risk on the other.
