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The Long Term Investing Fallacy

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To be sure, some will dismiss the idea of defining and proactively measuring investment risk. They will praise the merits of long-term investing. They will insist that the buy-and-hold approach makes extraordinary sense. Invariably, they will raise Warren Buffett’s name, and cite one of his many investing homilies. Of course, it is hard to argue with the world’s most successful investor, but there is one point that is beyond debate. 

Almost no investor actually behaves like the Sage of Omaha. This makes Buffett perhaps the most quoted, and least followed investor in the history of the world.

In reality, many people make bad, emotional decisions in response to market movements and act like bad traders even though they think they are long-term investors. The only long-term part of their approach is how much time they spend in the market. It usually has nothing to do with how much time they own particular investments. This disconnect is a great curiosity that reflects the psychological difficulties of investing. 

Most people work hard, save money through sacrifice and habit, and they try to amass a significant amount of money for their retirement. When those portfolios are tossed around like little boats in rough seas, strange decisions often follow. People sell when they should buy, just as surely as many buy when they should sell.

These farragoes of fear usually stress and often erode, relations between investors and their advisors. When market conditions bully allocations, investors often lose trust in their advisors, and advisors can lose client accounts. One way to proactively address those difficulties is by pro-actively educating clients on different investment risks their portfolios are exposed to as that will help them during those inevitable moments when barely anyone remembers. Buffett’s dictum is to be greedy when others are fearful, and fearful when others are greedy. 

By discussing investment risks, just like investment goals, advisors can educate clients about the realities of financial markets. Those discussions, and associated investment strategies, help advisors evolve their relationships with their clients. In those instances, and thereafter, they become educators and counselors, not just salespeople. What happens next is often profound. 

Advisors are able to show their clients how the most successful investors on Wall Street – including Buffett – are always focused on risk and return.

StratiFi’s PRISM Ratings™ risk scoring technology provides RIAs, asset managers, and broker-dealers more insight into the risks in their clients’​portfolios and their own business, so they can pick the risks they want to take. Contact the StratiFi team to find out more and get started today!

Akhil Lodha
Akhil Lodha Author
Co-founder & CEO StratiFi Technologies

Building the industry standard for understanding portfolio risk through cutting- edge technology at Stratifi.

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