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Long-term vs. short-term

This probably seems counterintuitive, but in investing short-term outcomes are much less predictable than long-term outcomes. That's why being successful over the long haul involves ignoring much of what is happening in the short term.

Consider this quote from Bob Reynolds, CEO of Putnum Investments, in an interview published this week by Morningstar:

So much of investing — probably the most critical point — is time horizon. It's having a real grasp on what you are investing for.

The most interesting thing about the market is that the longer-term your time horizon, the more predictable the market is. I think it's...being able to put together the right portfolio, and then taking that type of view of the market and not react to day-to-day movement. (emphasis mine)

That's easy to lose sight of, particularly because the market seems to flit from one short-term preoccupation to the next. One month it's the collapse of the dollar, then it's the debt troubles in Greece, then it's slowing growth in the U.S and the fear of a double-dip recession.

It's important to recognize that the market always has a boogey man. There has to be one, almost by definition, for the market to function in balancing the bullish and bearish case.

That's where the importance of time horizon comes in. The longer yours is, the more you can tune out this day-to-day, week-to-week, month-to-month endless cycle. The shorter your time horizon is, the more damage these short-term issues can do to your portfolio.

But that's also why you adjust your portfolio allocation as you age, to counteract the fact that you are more vulnerable to short-term market displacements due to your shorter time horizon.

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