Horizon planning

I like to run. I’m injured at the moment, but I was in the car with my daughter the other day and a large guy ran past us – fast! His legs and arms pumping, knees up, head back, breathing hard and beetroot faced.

My daughter Emma, clearly impressed, asked “is that how fast you run dad?”. It isn’t. I run 5-10km. I told her that Mo Farah would struggle to maintain that chap’s pace for 5km.

Investing is a bit like this. Going really fast for short bursts looks impressive. It’s also what some people want – maybe the runner we saw is a sprinter or rugby winger. With investments, some shares go up really fast. Very few are like Mo Farah and can maintain sprint pace for a long time. No one can sprint 10km. If they try, they almost certainly won’t finish.

At Equilibrium, we believe it is vital to understand your time horizons. In Morgan Housel’s book, The Psychology of Money, he notes that “few things matter more with money than understanding your own time horizon”.

In the book, Housel looks at investors buying shares in companies that have already gone up massively. It can be tempting to buy something that has made huge returns recently. In 1999, Cisco’s share price increased 300% to $60 per share valuing the company at over $600bn. It is now valued at just £186bn.

I noticed that Tesla also reached a market cap of $600bn this year. If Tesla’s growth were to continue at the rate we have seen over the last year, it would be worth more than the whole US economy by 2026.

An article in Bloomberg in July highlighted that “Ten Thousand Day Traders an Hour Are Buying Tesla Shares”. These people aren’t crazy. Housel points out that, for some people, it makes sense to buy at an elevated level. If you are a day trader then you don’t worry about what the share price of Telsa will be in six years’ time. If your concern is tomorrow, then buying Tesla shares at $646 may make sense.

These investors may be running a completely different race to people who are investing for five-10 years. When we see people running down the street, we don’t know how far they have been or how long they will keep going. The chap I saw doing a lung busting sprint may have turned a corner and walked into a house that he’d only left a few minutes earlier; the same is true for investing. We don’t know who else is buying, or why, or what their time horizon is. Funds and shares may be labelled as good or bad but; in reality, that can change considerably depending on when they are assessed and the time horizon you are assessing.

For our clients there may be some times where we can afford to run more quickly, or perhaps parts of the portfolio where we can afford to take a different approach, running at a different pace according to their needs at different times. For most of our clients we are trying to make sure that the money lasts for the duration of their personal journey, fully extending out into their investment horizon so that it is employed in the best way and at the right pace for them. It’s impossible to sprint to the horizon – physically or in an investment strategy.

Risk warning: the content contained in this blog represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments will fall as well as rise and you may not get back your original investment.