Why Fee-Based Financial Advisors Warn Against Short-Term Investing Focus

Why Fee-Based Financial Advisors Warn Against Short-Term Investing Focus


In the intricate world of investing, fee-based financial advisors consistently caution against the allure of short-term market gains, suggesting instead a steadfast focus on long-term investment strategies. The argument that while the volatility of stock market returns can be tempting over short periods, historically, the methodology of long-term investments, advocated by certified financial planners and independent financial advisors alike, has shown to almost always outperform the market when compared to strategies that attempt to time investments.

Delving further into the principles of long-term investing, fee-only financial planners and independent financial advisors in Hong Kong underline the importance of patience and diversification. Such strategies not only safeguard against market volatility but also align with the financial goals of individuals, ensuring a more secure financial future.

As the financial landscape continues to evolve, the role of a financial planner in Hong Kong and elsewhere becomes increasingly crucial, guiding investors through the noise of short-term market fluctuations and fostering a disciplined approach that focuses on the enduring value of patience and strategic planning


The Allure of Short-Term Gains

Often known as Short-termism, many investors and companies succumb to the allure of short-term gains, prioritising immediate financial returns over sustainable growth, often influenced by shareholder pressures for quick gains.

The fast-paced growth of technology has also played a role in reinforcing short-termism. This cultural shift today prioritises efficiency and convenience, often at the expense of thorough, strategic, and long-term planning. This may lead to a trust crisis and a general lack of purpose.

The prevalence of social media platforms like Twitter and Instagram exemplifies this trend, encouraging brief, to-the-point messages that often lack depth and meaningful engagement with immediate call-to-action such as ‘buy now while stocks last’ messages to unsuspecting individuals causing needless panic.


Consequences of Short-Term Thinking

Immediate financial needs or the strategy to secure profits in a volatile market can trigger the realisation of short-term gains.

Despite the potential for quick profits, short-term investments carry their risks. They may incur higher trading costs and emotional stress due to frequent market fluctuations. Over time, these factors can erode potential gains, making long-term investments a more stable avenue for wealth accumulation.

The structure of incentives for money managers is often based around short-term performance, which further perpetuates short-termism. This focus can detract from achieving sustained growth and long-term value creation for investors, whilst leading to higher transaction costs. When investing, have your long-term goal in mind.

Moreover, the liquidity and perceived lower risk of short-term investments might seem appealing, but they often result in missed opportunities for significant growth, as seen in long-term investment strategies.


cost of timing the market graph

Used in: Venture Capitalist by Neufeld (2023). “Timing the Market: Why it’s So Hard, in One Chart.”


Balancing Short-Term and Long-Term Objectives

In navigating the complexities of financial planning, individuals and companies must adeptly balance short-term and long-term objectives to achieve sustainable success. This balance requires a clear understanding of one’s financial goals and the corresponding risk tolerance levels.

For instance, short-term financial goals might include immediate plans like saving for a vacation or covering an upcoming expense, necessitating accessible, low-risk financial instruments such as savings accounts. Conversely, long-term goals such as retirement savings demand a more aggressive approach, potentially involving equities or other high-return investments that bear fruit over many years.

Effective financial planning also involves the strategic allocation of resources. A recommended approach is to maintain an emergency fund covering 3-6 months’ worth of expenses in a high-interest account, ensuring liquidity and security. For goals extending beyond three years, the choice of financial instruments should reflect the potential impact on one’s net worth, with a mix of equities and fixed-income products tailored to the timeline and risk profile of the individual.

Fee-only financial planners can help guide you through this process.


The added benefit of having an advisor along the way

Short-termism can be exacerbated by cognitive biases where investors favour immediate rewards over future gains, known as temporal discounting bias.

This is just one of the many biases in behavioural finance which affect the way we invest. Studies have shown that one of the values added to having a financial advisor is that behavioural coaching can add up to 200 basis points in net returns for clients.

Financial advisors play a crucial role in mitigating short-term biases by emphasising the importance of long-term strategies and helping investors stay focused on their long-term financial goals, thus adding significant value beyond mere investment management.

Advisors are critical in navigating these waters, guiding investors beyond the tumult of short-term market fluctuations and toward the horizon of long-term financial goals. The role in highlighting the importance of behavioural theories and the impact of cognitive biases becomes indispensable, grounding investors in strategies that resist the fleeting temptations of the market.