Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 94

Why long term investing is not easy

The benefits of long term investing were outlined in the previous Cuffelinks article in this series. Long term investors have capacity to access a broader range of investment strategies, in part due to an absence of pressure to deliver short term outcomes. And they can exploit opportunities arising from the actions or aversions of the short term investors who often dominate markets. It all sounds good in theory. This article discusses why it is not so easy to do.

The distant future is hard to predict

While any investment is based on expectations about the future, both the challenge of forming a view and the potential implications of getting it wrong are compounded over longer terms.

Predictions about the distant future can be limited and of low confidence. Errors might simply result from poor analysis or bad forecasting. More decisively, the fundamentals may transform in ways that are hard to anticipate. ‘Regime shifts’ can occur in the underlying profitability of an industry or company, the economic environment, or market conditions. Financial history is littered with instances where supposedly durable features have been turned on their head. In the 1980s, markets were driven by inflation fears; interest rates were 15%-20%; PE ratios above 10 times were considered too expensive; Japan was the leading economy; there was no internet; and Australian media, building materials and gold companies were all highly prized. Banks were considered uninspiring, low-returning investments. All of this has changed. The people in charge also matter for how investments perform, and they too will change. The foundations underpinning any long term investment can shift and you don’t want to be on the wrong side.

The cost of getting it wrong

Incorrect expectations can have particularly weighty consequences when investing for the long term. Feedback mechanisms are hazy when expectations relate to a future that will not arrive any time soon. Long term investors who invest on false premises stand at risk of underperforming for a considerable period before the error is fully recognised.

Even once an error becomes apparent, extraction from the position can prove problematic. Often an underperforming investment will continue trading at seemingly low prices at which selling may seem unjustified, even though the initial rationale for the position has disappeared, i.e. it can turn into a ‘value trap’. Behavioural forces may come into play. The notion that we are ‘investing for the long run’ might become an excuse to avoid taking action. (This is one side of the ‘disposition effect’.) Further, many long term investments entail commitment. For instance, it can be difficult to trade out of unlisted, illiquid or opaque assets. And if their fundamentals are under pressure, a large haircut may be required to secure an exit. Basically, long term investors who make fundamental errors face the risk of getting ‘locked-in’ to underperforming positions. In contrast, short term investors more typically invest in a manner that facilitates turning over their positions, including the utilisation of stop-losses. They are less likely to get entrapped.

Staying the course

If a long term opportunity is correctly identified, exploiting it still relies on the commitment and fortitude to sustain the position. Long term investments might initially generate losses that persist for an uncomfortable period. Various forces could act to undermine commitment in such circumstances. Individuals who suffer doubt may be more susceptible to behavioural influences, such as the inclination to herd with the crowd. Fund managers can be placed under organisational pressures to address underperforming positions. Their investors could redeem funds; investment board support could crumble; or colleagues with a differing view may advocate for reversing the position. The managers themselves could get blamed for the underperformance, and replaced. The decision of whether to hold or fold on a difficult position can be tortured, and markets have a habit of creating maximum pressure to reverse course at exactly the wrong time.

Alignment issues within investment organisations

Investment organisations delegate decisions to ‘agents’ who may not be fully aligned with a long term approach. Investment staff could be operating on shorter horizons than their organisations, or the strategies they are supposed to pursue, as they are managing their own incentives or careers. Remuneration arrangements that are truly long term are rare in the fund management industry, where regular bonuses are paid. Staff may be concerned about promotion prospects, or their own value in the job market.

Many organisations such as superannuation funds outsource to external investment managers, and securing alignment can be tricky. The horizons of external managers are often limited because short term performance determines both the success of the organisation via the link to funds under management. A long term approach is hard to sustain when those making decisions are following a different agenda.

Avoiding the pitfalls

Long term investing must meet the challenge of dealing with long term uncertainty. As any forecast will likely be wrong, the aim is to build robustness into decisions. Three approaches include:

  • Invest with a ‘margin of safety’ between the price paid and estimated long term value
  • Evaluate investments against a wider range of scenarios
  • Continually test the long term foundations for a position and don’t just set and forget.

A further suggestion is to favour positions that arise from the actions of short term investors in the first place. Long term investing is likely to work because the long term is undervalued in the markets, and not because it is easy. When an opportunity can be traced back to the actions of short term investors – such as the presence of forced sellers or buyers, or reactions to transitory influences – then a long term investor might take comfort that they are on to something.


Geoff Warren is Research Director at the Centre for International Finance and Regulation (CIFR). This article is for general information purposes and readers should seek independent advice about their personal circumstances.

CIFR recently collaborated with the Future Fund on a research project examining long term investing from an institutional investor perspective. This series of Cuffelinks articles aims to bring out the key messages for a broader audience. The (lengthy) full report, which comprises three papers, can be found at:


Leave a Comment:



Investing is like water, but what the hell is water?

Why market forecasts matter to long-term investors

'Do nothing' is good financial advice worth paying for


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.