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Behavioural finance: Short-termism

At the start of a new year, investors tend to ponder the prospects for the subsequent 12 months. It says something of how short term the focus in markets has become that this may be one of the relatively few occasions when many investors even think that far ahead. One of the understandable yet unhelpful consequences of the financial and sovereign crises has been the short-term focus it has encouraged in many investors. Add in the use of monthly and quarterly investment performance to evaluate progress and the market’s relentless focus on quarterly earnings, and it’s easy to see how short termism has become a baked-in feature of stock markets. Such short-termism, however, is at odds with building long-term portfolio wealth.

The evidence from major stock exchanges highlights that investors have become more short term over time, if we consider the average holding period of stocks. In the US, the average holding period of a share on the NYSE was around seven years in 1940. The average holding period globally is now under three months, and this is only partly explained by the entry of short-term, technically driven investors.

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