WiserAdvisor – Blog

Main Menu

  • Home
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Estate Planning
  • More
    • Personal Finance
    • Portfolio Management
    • Financial Trends/Government

logo

Header Banner

WiserAdvisor – Blog

  • Home
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Estate Planning
  • More
    • Personal Finance
    • Portfolio Management
    • Financial Trends/Government
Financial Planning
Home›Financial Planning›Ways to Circumvent Short-Termism

Ways to Circumvent Short-Termism

By WiserAdvisor Insights
June 5, 2020
341
0
Share:
Ways to Circumvent Short-Termism

Last Modified on June 8, 2020

Short-termism is defined as an investor’s extreme concentration on profits made on the basis of short-term analysis at the cost of long-term benefits. This short-sightedness of investors forces them to make decisions based on the quarterly and annual performance of stocks and companies. Short-termism also arises due to the boost in the number of available investment opportunities. A constant update on the performance of the stock market further aggravates this situation. In an attempt to move ahead of the market, investors tend to engage in several short-term transactions. In addition to this, a decline in stock value during the short-term creates the fear of losing hard-earned money, resulting in immediate corrective actions by investors, leading to short-termism.

Issues created by Short-Termism

Short-termism leads to several issues, not only for the investor but for companies as well.

1. High transaction costs

This is one of the major drawbacks of short-termism. Investors react to every movement of the stock market resulting in an excessive number of transactions. This results in higher taxes, increased transaction costs and fees, and lower average returns. Still, investors somehow fall prey to the myth that a greater number of transactions can lead to better results and more control over the equity portfolio. An asset allocator is considered backwards when the instantaneous transaction is not done with a change in asset value.

2. Long-term profits foregone

With a reduction in the holding time of stocks, investors lose out on the long-term profits that can be earned from those stocks. Not every stock is meant to perform in the short run. Market forces cause fluctuation in the stock values. Those who maintain calm during these fluctuations are likely to earn returns in the long run. Those who react with a slight change can never know if the stock was meant to perform positively or not. Historical data suggests that the share market has witnessed a striking reduction in the average holding time of stocks. Currently, an investor holds a stock for an average of a couple of months, whereas in 1940, this period was approximately seven years.

3. Hindrance in advancements

Due to short-termism, companies are under pressure to display positive performance even during monthly and quarterly reports. In its absence, the company tends to lose investors. This prevents companies from investing in staff, research and development, product innovation, etc. These strategies require substantial investment, and initially, there are no visible returns. The positive outcomes from these approaches commence only after a couple of years. Nowadays, investors do not give that much time to companies for giving out profits.

4. Societal penetration of myopia

The myopic philosophy of shareholders has now become an intrinsic part of our society and public life. It has been followed so consistently that it has crossed the boundaries of corporations and financial markets. Short-termism has adversely affected institutions in every industry. Long-term investments are being alleviated due to schemes that promote current consumption. Nearsightedness has become a way of life, stretching beyond the dimensions of investment.

Circumvent short-termism

While short-termism has become the new investment approach, several drawbacks make it important to circumvent it. The following points can be used to achieve this goal.

1. Frequency of financial statement issuance

This is the most widely sought-after solution for short-termism. It has been long suggested that companies should eliminate the issuance of quarterly and half-yearly financial statements. This will prevent investors from taking hastened decisions based on the financial parameters of the company.

2. Extension of compensation measurement period

It has also been suggested that the period over which the compensation for executives is decided should be extended. This will allow employees to focus on the quality of transactions, rather than the number of transactions. Currently, the remuneration is paid depending upon the short-term achievements. However, the incentives should be given through the period when the profits from the transactions are realized, thereby justifying the incentives.

3. Modification in performance parameters

This change is extremely important. The indicators along which the company’s performance is measured must be modified. The performance indicators should include the company’s growth drivers, rather than the stock value.

4. Focus on sustainability

Financial managers must promote the concept of sustainability rather than only profitability in the short-term. The idea of long-term investment should be reinforced among investors. However, this can only be achieved if financial managers themselves are not judged against only financial performance.

5. Strategic thinking by the board of directors

Board of directors can have a solution to the problem of short-termism. They can think in a strategic manner leading to an amalgamation of short-term accomplishments with long-term objectives. To achieve this purpose, directors must be well versed with the company’s policies. They must be aware of the comprehensive plans of the organization and the sector in which it is operating. This strategic approach can be instrumental in allowing directors to be well prepared for dealing with circumstances that result in short-termism. These circumstances can include share buybacks, modifications to dividend policies, etc.

To sum it up

Short-termism has affected not only companies but also investors and society like an epidemic. While it might seem tough to circumvent this myopia, it is not unattainable. However, it will require efforts from investors, directors, financial intermediaries, and executives to achieve this goal. The solutions to this problem do exist but can be quite complicated in terms of understanding and execution. Therefore, it is only suitable to take the assistance of a knowledgeable and experienced financial advisor to formulate and implement the solutions.

TagsAssetsDividendInvestmentLong-Term ProfitsMarketStock
Previous Article

Everything You Must Know About Over-Diversification in ...

Next Article

The Effect of COVID-19 on Retirement Planning

0
Shares
  • 0
  • +
  • 0
  • 0
  • 0
  • 0
WiserAdvisor Insights

WiserAdvisor Insights

A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.

Related articles More from author

  • Investment-Strategies
    Financial Planning

    Tips for Dealing with Failed Investment Strategies

    April 2, 2020
    By WiserAdvisor Insights
  • Investment-Plans
    Financial Planning

    Different Age Groups, Different Investment Plans

    September 2, 2019
    By WiserAdvisor Insights
  • Investing in Opportunity Zones
    Financial Planning

    Everything You Need to Know About Investing in Opportunity Zones

    February 13, 2020
    By WiserAdvisor Insights
  • Investment
    Portfolio Management

    How to Improve Your Investment Portfolio in 2021

    January 4, 2021
    By WiserAdvisor Insights
  • 6 things you must remember about dedicated portfolios
    Financial Planning

    6 Things You Must Remember About Dedicated Portfolios

    August 20, 2020
    By WiserAdvisor Insights
  • Re-examining Bonds in Today's Low Interest Rate Environment
    Portfolio Management

    Re-examining Bonds in Today’s Low Interest Rate Environment

    September 24, 2020
    By WiserAdvisor Insights

You might be interested

  • Money-Statistics
    Financial Planning

    Surprising Money Statistics That You Need to Know

  • Revisiting Your Financial Plan Amid the Global Pandemic
    Financial Planning

    Revisiting Your Financial Plan Amid The Global Pandemic? Here’s All You Need to Know

  • Retirement-Assets
    Retirement Planning

    Actionable Strategies to Make Your Retirement Assets Last Longer

  • Popular Posts

  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • financial planning DIY-Checklist

    How to Prepare an Annual Financial Plan – Financial Planning DIY Checklist

    By WiserAdvisor Insights
    June 10, 2019
  • IRAs-Work-401

    How IRAs work? 401k vs IRA

    By WiserAdvisor Insights
    July 4, 2019
  • Retirement-Planning

    Retirement Planning checklist

    By WiserAdvisor Insights
    July 8, 2019
  • Financial-Advisor

    Why and When do you need a Financial Advisor?

    By WiserAdvisor Insights
    July 8, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • monitor your financial advisor

    How to monitor the activities of your Financial Advisor?

    By WiserAdvisor Insights
    July 16, 2019

Don't miss out! Get our Helpful Financial Tips Newsletter

Categories

  • Business Finance (2)
  • Education Planning (23)
  • Estate Planning (16)
  • Financial Advisor Guide (14)
  • Financial Planning (91)
  • Financial Trends/Government (2)
  • Personal Finance (8)
  • Portfolio Management (36)
  • Retirement Healthcare (1)
  • Retirement Planning (65)

WiserAdvisor is America’s oldest and largest independent network of screened financial advisors. We make it easy and convenient for consumers to find and connect with advisors in their area. We have successfully helped over 100,000+ individuals find their best financial advisor since 1998 with no match fees, no commitments, no obligation, and complete confidentiality. WiserAdvisor has been featured in The Washington Post, The Washington Journal, ABC, CBS, Yahoo and has been seen in numerous other leading financial news and information websites.

Follow Us

  • Recent

  • Popular

  • ETFs

    7 Reasons Why ETFs Are Getting Popular Among Investors

    By WiserAdvisor Insights
    January 21, 2021
  • Education Tax Credit

    6 Important Pointers to Know About Education Tax Credits

    By WiserAdvisor Insights
    January 20, 2021
  • Covid-19-Vaccine

    8 Important Facts A Retiree Should Know About the Covid-19 Vaccine

    By WiserAdvisor Insights
    January 15, 2021
  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • financial planning DIY-Checklist

    How to Prepare an Annual Financial Plan – Financial Planning DIY Checklist

    By WiserAdvisor Insights
    June 10, 2019

Contact Us

Corporate Headquarters

12150 Monument Drive, Suite 400
Fairfax, VA, 22033

Business Hours

8:30 AM – 5:00 PM EST (Monday – Friday)

Email Address

wa.assistance@wiseradvisor.com

Phone Number

(703) 651-2060

Fax Number

(703) 259-4487

  • Privacy Policy
  • Terms & Conditions
© Copyright 2019 WiserAdvisor.com. All Rights Reserved.

Add WiserAdvisor - Blog to your Homescreen!

Add