The number one question investors should be asking themselves at all times is “what is my investment horizon?” More specifically, “what is my time horizon?”
Many times when I am coaching investors we discover that the ‘tool kit’ the investor is using does not exactly line up with their investment horizon.
One example of this is Twitter data. In recent years there has been a lot of noise about using AI, machine learning, to go through soft data such as Twitter feeds and read sentiment and pull out signal. Many look for investible patterns that you can get from Tweets. Some information does support this, but the issue is that this in on a very short time frame. Some studies say the information is only good for 1-2 days, so if your horizon is that short, you can use that data to support your investments.
At the other end of the scale there is an example such as demographic data (such as baby boomers retiring, etc.). Themes like this can play out over several years, or even decades. If your investment horizon is fifty years, which is probably a timeline too far out, the information may be interesting, but will not support your timeline.
The reason is that between right now and then as the demographic shifts play out there will be a lot of cyclical and secular trends fluctuating. As a result, you may find yourself on the wrong side of markets waiting to play out too far down the road to be beneficial to you and your investments.
Those are two extreme examples of how if you are aiming at 3-6-12 months down the road, then you are using a tool kit that is not in line with your investment timeline.
You should be using things that are giving a read on the next 6-12 months in the financial market.
From a technical perspective, the data actually plays out as well. If your time horizon is pretty short (days to weeks, possibly months), remember that markets tend to mean-revert. This means that overall you are better buying weakness and selling strength.
On a much longer timeframe, in terms of multiple years, you are getting into a business cycle, which also tends to be cyclical. As sectors and themes come in and out of favors overall you should be betting on mean reversion. When something has been beaten down over the course of several years, you can traditionally expect it to recover after a period of time.
The ‘sweet spot’ is right in the middle. This is where momentum and trend following works. It is where the institutional technical tool kit is designed to work at its best. This means looking 3-6-12 months down the road, the statistical data will show you that you are better off not mean reverting, rather you are better off to follow trends. Additionally, this means also considering what is working, what is not working, any major changes or shifts that have taken place over the course of a good 6-12 months of data while you are making your analysis.
My challenge to you is to look at your tool kit and the information you are gathering and paying special attention to short-term information that you are applying to a long-term situation.
An example of this would Tweets about China. These are very short-term and will cause short-term fluctuations. An overall trade deal with China that will take months or years to evolve is the timeline you should be operating on.
Always make sure the tools you are using are in line with your time and investment horizon.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. Please see the Disclaimer page for full details.