The Long-Term Investing Fallacy

The financial services industry likes to preach the benefits of compounding returns and long-term investing. Have they overstated or even misstated their cause?

It’s common for industry types to illustrate unrealistic long-term time horizons of 100 or 200 years of equity returns (NYSEARCA:DIA) to prove that we should be long-term investors. The problem with this argument is that it’s completely irrelevant to you and me. Our present life span’s aren’t 100 or 200 years and neither is our investment time horizon.  (I call this type of apples-to-oranges analysis the “Jeremy Siegel Syndrome.”)

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Another common habit is to categorize all investors – regardless of their age, risk tolerance, or needs – into one big group and to lecture them to be “long-term investors” as if it’s the solution to what ails their money. This type of negligent advice is tantamount to financial malpractice!

The simple fact is people above age of 50, 60, and 70 do not have the same investment time horizon as people that are 20, 30, and 40 years old. Most people at or near retirement do in fact have a much shorter investment time horizon and a higher need for investment income and portfolio liquidity. Moreover, older people have less time to recover from a significant market decline compared to younger people.

Here’s another uncomfortable truth: Wall Street’s unsatisfactory investment performance is often shrouded behind its long-term investing pitch. For example, if you have a portfolio or funds with lousy performance, give it a few more years to get better, is how many investment customers have been brainwashed to think.

Bottom line: Long-term investing in stocks (NYSEARCA:VT), bonds (NYSEARCA:BOND), real estate (NYSEARCA:VNQI) or whatever else is not the panacea for a misaligned investment portfolio. And telling a person whose portfolio is poorly constructed or getting clobbered to “be a long-term investor” and “not to panic” is brave advice but not necessarily the right advice. Staying the course won’t fix portfolios that are ignorant about cost, taxes, risk, and diversification.

I wish long-term investing could fix crazy people with self-destructive habits and architecturally unsound portfolios. But it won’t.

Ron DeLegge is the Founder and Chief Portfolio Strategist at ETFguide. He’s inventor of the Portfolio Report Card which helps people to identify the strengths and weaknesses of their investment account, IRA, and 401(k) plan.