Cultivating a Long-Term Mindset

True value—the kind of value that creates a bigger pie for everyone—is never created quickly. Such value creation requires endurance and a long-term mindset. A mindset that asks: “How do I leave this place better than when I started? How do I lay the foundations for the next generation to build on?” Thinking long-term is not always easy. But through discipline, resilience, and purpose, investors can maintain a commitment to thinking long-term. Cultivating a long-term mindset is worthwhile because the investors who can focus on the long-term are able to build and experience enduring value.

Discipline 

Progress is made over time, but it is not linear. Disciplines rooted in a long-term philosophy help keep investors on track when disruption occurs or the “next big thing” seems too good to pass up.

It is common for investors to get shaken out of the market in times of volatility. Over the past 20 years, the average investor achieved just a 2.5 percent annual return, versus the S&P 500®’s annual return of 6.1 percent[1]. Investors who react emotionally to market fluctuations and chase performance often hurt their long-term outcomes.

Many investors who pulled their money out of the stock market in March of this year missed out on the unexpected recovery that followed shortly thereafter. But those who remained disciplined and stayed invested participated in the rally.

Conversely, during the dotcom bubble of the late 1990s, many investors deviated from their investment disciplines because of short-term pressures and fear of missing out, only to lose a lot of money when the bubble burst.

Discipline cannot prevent the unexpected, but it can help keep investors from making the behavioral mistakes that derail progress and dampen returns.

Resilience

While discipline helps investors avoid mistakes, resilience allows them to recover from behavioral errors or from disruptions beyond their control.

Resilience needs to be built-in to an investor’s mindset and plan—expect the unexpected. Investors with a short-term mindset do not like surprises and do not position themselves to adapt and recover. But investors with a long-term mindset expect surprises and are prepared to at least weather them, if not use them as an opportunity for growth.

Appropriate asset allocation and diversification provides the foundation for resilience and endurance when unexpected events impact asset prices. There are both practical and emotional implications to consider in this regard. Practically, if an investor gets completely wiped out or the portfolio declines to a point where liabilities cannot be covered, it is hard to recover. But even if an investor can mathematically survive a decline in assets or an investment that performs unexpectedly, his or her emotional response may lead to mistakes. Resilient investment portfolios are designed to consider both the practical and emotional, positioning an investor to endure fluctuations, take advantage of opportunities, and experience the value creation that occurs over time.

Purpose

Discipline and resilience can guide investors, but they are only relevant if an investor knows what they are investing for. A long-term view must start with a sense of purpose. Purpose gives meaning, and meaning is what motivates us and guides behavior. Purpose helps investors visualize where they are going and why.

In the world of financial markets and investments, it is easy to make it all about money. But more money is not a purpose (at least not a very good one). More money is the outcome of value created, but investors should have their purpose rooted in something bigger than themselves. Purpose is about creating enduring value in the world. Having purpose helps maintain a long-term view; patience is more easily exercised when investors focus on the worthy objectives they are pursuing.

[1] https://am.jpmorgan.com/blob-gim/1383407651970/83456/MI-GTM-4Q20.pdf page 72