The attention span of today’s investors give ADHD a bad name and has driven an obsession with the short term. The average mutual fund holding period has fallen by 75% over the past 16 years. For stocks the data is even more bizarre as the average holding period has fallen from 8 years in the 1960’s to 5 days today. One of the consequences of such a short investment time horizon is that investors have begun to fear short-term market events and volatility as much or more than the factors that shape prospects for long-term economic and profit growth that drive stocks over the longer term.
As such, investor’s patience with performance has followed the same declining trend. While this may seem like the right thing to do, a study by the Brandes Institute showed this obsession with the short term a bad idea. Some interesting data from their study shows
Every best performing (10 year out-performance of SP>3% annually), long-run fund have had periods of major under-performance.
o The average worst 1 year period was ~20% under-performance (6-38% range)
o The average worst 3 year period was ~10% under-performance/year (1-20% range)
o 73% of these top performers found themselves in the lowest decile at least once
These types of results are not just unique to individuals who buy and sell mutual funds. Boyal and Wahal did a study on 4000+ decisions regarding hiring and firing of investment managers by pension plan sponsors. The results uncovered the classic hallmarks of returns-chasing behavior. The managers the sponsors tended to hire had an average out-performance of nearly 14% in the 3 years prior to hiring. After hiring those same manager’s performance was statistically insignificant … meaning their performance matched the benchmark. No out-performance. In contrast, those fired for performance reasons had underperformed by ~6% in the 3 years leading up to dismissal. However, in the 3 years after the firing, they outperformed by 5%.
This helps illustrate that 1) even the best long term performing money managers run into short term difficulties 2) Investors need to insure they keep their focus on the long term as short term reactions can have long term negative effects on their portfolios.