The Time Horizon Problem

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 16, 2016 2:59:20 PM

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time horizonWith market turbulence continuing today and questions pouring in, I am struck once again by the core issue we’re wrestling with here: the time horizon problem. Although we get meaningful results in the long term, we often feel compelled to react in the short term.  Unfortunately, decisions that feel good in the short term are usually directly opposed to what brings optimal results in the long term. 

Basically, we are wired to sabotage ourselves over time.

Can we learn anything from the health care industry?

Recently, my colleague Kol Birke convened a meeting with senior medical, professional, and data experts at Partners HealthCare in Boston, to see what we could learn from each other. Their mandate is to set up systems and procedures that yield optimal health results, to the benefit of their subscribers and the system itself. 

During the discussion, it became increasingly clear that the health care field suffers from exactly the same time horizon problem as investing. Ice cream is good now, while exercise takes weeks or longer to pay off. Spending, or selling an investment that just dropped, feels good now, while retirement is years away. All too often, now trumps the future. And unfortunately, long-term success depends on ignoring our brain's demands that we act now.

There is certainly a need, in both health care and investing, to improve our results. With obesity up and savings low, we need to do much better. I’ll report on our ongoing discussions with Partners, but here are some initial thoughts.

Set up reminders/automatic actions. When it comes to remembering to take medication, e-mail or text reminders seem to help. For investing, getting a call from your financial advisor to review your accounts on an annual basis can be equally helpful, as can having a part of your salary automatically deposited to an investment account instead of a checking account.

Focus on metrics that matter. Weight fluctuates, so weighing yourself every day can be counterproductive. Better to do so weekly, or even monthly, to keep an eye on longer-term trends. In other words, match your attention with the actual cycle of what you are tracking. The same, of course, is true for investing. The day to day, or even month to month, doesn’t matter so much. What matters is the long-term result. Watching and worrying about the market on a daily basis helps neither your happiness nor your account balance. (Quite the contrary.)

People are different, so do what works for you. A notable point made by the Partners team was that no one strategy worked for the entire patient population. Instead, they developed a range of strategies and often had to try several before finding what worked for any given person. In terms of managing your finances, focus on finding something that works and helps take away the temptations of the now.

My usual comment when talking about market volatility is that the biggest risk investors face is often their own reactions. Thinking ahead, and minimizing the need to make decisions under stress, can help. Developing good health habits, or financial habits, can do the same. However you do it, though, keeping your eye on the destination rather than bumps in the road will make you substantially more likely to succeed, as well as happier in the process.

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