To all retail investors, I have a question for you: What’s your investment window?
In other words, how long do you typically hold your investments? Years? Weeks? Days? Hours?
Are you a day trader ducking in and out of investments depending on the day or your mood? Or do you lock your money up for the long-term in something safe like CDs, Money Market Accounts, and treasuries?
Why is a person’s investment window important?
Because it will tell you a lot about that person’s investment goals, habits, and risk tolerance. Retail investors with short investment windows are risk-takers and aren’t interested in cash flow.
They’re willing to speculate – relying on timing to profit from price fluctuations on Wall Street – if it means the potential for a big payoff.
On the other end of the spectrum, you have retail investors with long investment windows who are risk-averse and are therefore willing to sacrifice returns in the interest of preserving capital.
That’s why they’re interested in safe long-term investments like CDs, Money Market Accounts, Treasuries, etc. that offer minimal cash flow but they’re never at risk of losing their entire investment like with equities.
The COVID-19 pandemic has had an interesting effect on many individuals’ financial outlooks.
It thrust many who either lost jobs or suffered pay cuts into the uncomfortable but – some would say – necessary position of having to reassess their investment approach – if they had one at all.
For individuals who saw their income lost or reduced by COVID-19, they were forced to re-calibrate their investment objectives – most seeking a way to avoid being in the helpless position again of wondering where their next check would come from.
These individuals fell along the entire retail investment spectrum – from those who never invested before to those who already had long-term investments.
Regardless of where they fell on the investment spectrum, whether individuals who were left reeling from the economic fallout from the pandemic or retail investors who saw net worth wiped out from the market crash in March – many emerged with renewed investing objectives.
Many adopted one or a combination of the following two goals:
- To find an immediate way to replace or supplement lost or reduced income.
- To grow wealth and ensure income to shield against future disasters.
For the risk-takers among this group, millions and millions of them adopted a short-sighted investment approach – looking to solve all their financial problems in one fell swoop. Newly out of work, confined to their homes, and armed with stimulus checks, these risk-takers took to day trading to cure their financial woes.
As a result, the market saw a massive surge in new accounts with online brokers as newly minted day traders dove in headfirst – hoping to hit the lottery. Charles Schwab, TD Ameritrade, Etrade, and Interactive brokers all saw record new sign-ups, while millennial-favored Robinhood, which offers free trading, saw a historic 3 million new accounts in the first four months of 2020.
The problem with adopting a short investment window like day trading is that very few investors make money doing it. Most individual investors not only fail to beat the market but most don’t even earn enough to cover inflation.
A JP Morgan Chase Asset Management report found that retail investors have averaged a 2% annual return in the last 20 years, which was outpaced by inflation which averaged 2.43% annually during this time.
On the other end of the spectrum, the risk-averse who had their investments in long-term retail products like treasuries and CD’s who were forced to liquidate their assets to make ends meet – if they could liquidate at all – discovered how inadequate these investments had been for building or preserving wealth what with the piddly returns these assets were generating.
Where could these investors turn to now?
What options did they have?
Day trading was too risky and the long-term public options – as they had discovered the hard way – were inadequate for building wealth.
The risk-takers and the risk-averse had something in common:
Both would discover, if they hadn’t already, that there was no satisfactory solution for meeting their new investment objectives in the public sector.
For investors looking to replace or supplement their incomes or to build and preserve wealth, Wall Street’s short-term and long-term options are both inadequate. The solution would have to come from somewhere outside Wall Street.
For securing income while building long-term wealth, investors should look to the private markets and look to invest with and beyond 2021. All you have to do is look at the investing habits of the ultra-rich.
Savvy investors have an affinity for alternative investments in the private markets and they have investment windows of 7+ years. They not only seek but demand long-term investments.
Because long-term investments are illiquid and illiquid investments protect investors from themselves by taking emotion out of the investing equation.
Long-term private investments are not susceptible to the same type of emotion-fueled volatility and uncertainty that is seen on Wall Street.
Wall Street’s liquidity too often enables investors to act on their slightest impulses and to indulge irrational behavior. The result is extreme volatility in the markets where only a lucky few who are in the right place at the right time make money.
This may work for the speculator with a short investment window but not for the investor seeking recession-insulated income looking to build long-term wealth.
The ultra-rich savvy investors insist on long-term investments because these investments typically offer cash flow with long-term appreciation backed by a tangible asset – whether it be a productive business or commercial real estate.
These assets are ideal for ensuring consistent income and building wealth and can only be found in the private markets.
Smart investors know that in the long-run, income-producing assets deliver some of the best risk-adjusted returns of any asset class.
Investing long-term allows the law of averages to play out. Being in an investment for too short a term can mean catching the brunt of a downturn without seeing the benefits of a rebound.
Long-term investments can ignore short-term fluctuations because it all works out in the end. That’s why the ultra-rich have always been attracted to long-term investments for these host of advantages short-term stock trading can’t provide.
Today, the smart investors are not only investing for 2021 but more than likely they’re investing for 2028 and beyond.
Many investors left reeling financially from the pandemic re-calibrated their investment objectives, with many seeking ways to compensate for lost income while building long-term wealth.
The investment options for meeting these objectives are not found in the public markets but the private ones. And these private offerings are illiquid and therefore not compatible with short-term investment windows.
Achieving recession-insulated cash flow while building long-term wealth through reinvestment and appreciation will require those investors with short-term windows to expand their investing horizons and for all investors to look to private markets.
That’s why everyone should abandon Wall Street and invest with an eye beyond 2021.