Think more like a gardener

Investors are right to be growing weary of the investment climate today. After the worst global pandemic in a century, global financial markets have been hit by the shocks of inflation, war in Europe, higher interest rates, and now a potential banking crisis in the developed world.

Over the long-term, investing in a diversified portfolio of asset classes like equities and bonds has delivered excellent returns. But it is easy, when looking at historical returns over a long period, say 50 or 100 years, to miss the fact that in the past there were sustained periods of poor asset returns. These periods also often coincided with bouts of inflation, wars, and other major economic shocks.

Parsing out the short-term from the long-term, as a guide to successfully navigating periods like this as investors, is the subject of this week’s episode.

It is easy to fall into the trap of ‘information overload’, even at the best of times, given the amount of news and data available to people at the click of a button or tap on a phone screen. This is magnified in times of real-world stress and turmoil. The feeling of lurching from crisis to crisis can cloud investment making decisions and judgement.

This, at its heart, is a problem of short-term vs. long-term thinking.

As human beings we are biased to overweight short-term information vs. long-term. And this makes sense if you think about it. We evolved in dangerous environments where the immediate danger of wild animals, other humans, and the natural world around us, required us to respond to threats of danger and to do it quickly!

If you think you spotted a large carnivore roaming close to where your family and fellow tribe members are living, it’s very important for your survival, and the survival of the species, that humans respond to that risk.

This instinct remains important, even in the modern world, but it also creates problems for us as investors. Information inputs like, for example, a series of bank failures, or a major war in Eastern Europe, the possibility of an even bigger war in Asia over Taiwan, these can trigger similar emotional responses in our minds of ‘danger’ and ‘fear’. As with our example of spotting the large carnivore near the family encampment in pre-historic times, modern negative news stories can trigger a similar desire to ‘do something’. And this is a strong urge to ‘do something’, it comes from deep within us, we have evolved, for the right reasons, to respond to the thought of imminent danger.

Overcoming this short-term response, and instead focusing on the long-term, is a skill every investor should work on improving. While an emotional response to an imminent threat of physical harm does require an immediate response to avoid danger, such a response to a perceived threat from a geo-political risk five thousand miles away, or a bank failure five thousand miles the other way, does not require an emotional or immediate response in investment portfolios.

As investors, we should think more like a gardener. Anyone involved in that pursuit knows, intuitively, that the long-term is your friend. You take actions in the short-term to plant and maintain the garden, but this is all done with a long-term goal in mind, allowing the plants to grow and mature over time into something much greater than the cost of time and money the gardener puts into it in the first place.

Just like the gardener, as investors we must navigate the equivalent of winters, bad weather, and unexpected problems, but we must never lose sight of the long-term goal, and we must never interrupt the process of growth we triggered with our initial investments. The last thing a gardener should do in response to unexpected bad weather, is to rip up all of the plants by the root and start again!

As investors, we must remain long-term minded. The negative sentiment and uncertainty will pass, eventually, and in the meantime, we should be tending to our portfolios in a prudent way. What does that mean in practice?

It means going slow and steady through bouts of market volatility, taking time to think about the businesses and asset classes we want to own over the long-term and which will likely grow over a 5-year or 10-year period, invest in the appropriate strategies, and then allow the long-term to do the rest for you!