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Investing: Long vs Short Term
Ever wondered why there is a difference in how we structure short-, intermediate- and long-term investments? Here's why it matters for your personal goal achievement.
Daniel Lancaster
February 24, 2025
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“A person should set his goals as early as he can and devote all his energy and talent to getting there. With enough effort, he may achieve it. Or he may find something that is even more rewarding. But in the end, no matter what the outcome, he will know he has been alive.”
—Walt Disney
NEWS
What Happened Last Week
Investor sentiment has turned bearish in the past few weeks, indicating 40%+ investors expect a bear market at some point in the next six months.
As of Friday, the 10-year US Treasury yield is 4.42%, whereas the 3-month yield is 4.32%. The fact that the 10-year yield is above the 3-month yield is generally viewed as a positive economic signal.
The Composite Purchasing Managers’ Index (PMI) fell from 52.7 in January to 50.4 in February. That was driven by a drop to 49.7 in US Services and a rise to 51.6 in US Manufacturing. Above 50 indicates economic expansion.
The US Leading Economic Index (LEI) has been falling since 2022, but it’s most recent 6-month period only fell by 0.9%, whereas the 6-months prior to that fell 1.7%.
How I See It
Bear markets happen when the majority anticipates an upcoming economic recession.
That’s why it’s important to keep an eye on leading indicators and compare them with how investors are feeling.
Sentiment can swing quickly and dramatically. Fundamentals underlying the economy are usually much less sudden, gradually deteriorating in the lead up to an actual bear market.
There are exceptions, of course, like when the world gets hit by COVID-19 suddenly. But even that resulting bear market was over in a flash, behaving much more like an oversized correction.
But as I look at the data, the state of the world appears to be on par largely with expectations.
People are leaning pessimistic at the moment for several reasons. A lot is happening in the attempt to streamline systems, and that creates uncertainty.
One red flag has appeared, however, in that the US Services PMI has dropped below 50. But that has been counterbalanced by improvement in manufacturing, so it’s a wait and watch sort of scenario.
A great positive is that, even though we’ve long expected the slowdown of the US economy, the leading indicators show that the rate of slowdown has been leveling out. In other words, the risk of too much slowdown, resulting in recession, has declined.
The Conference Board, a global, non-profit thinktank which measures these LEI indicators, stated that this signals “milder downside risks to growth.”
With investors largely feeling bearish, a reasonably healthy growth outlook, and room for the Federal Reserve to implement further monetary policy, I believe the US market still has room to grow this year.
I believe the risk of a correction in the market (down 10%-20%) is quite high at the moment, but in terms of long, extended downturns…not likely, in my opinion.
PARADIGM SHIFT
Investing: Long vs Short Term
We save and invest for a multitude of reasons. Several common themes include:
Retirement
College
Leaving a legacy
Small business purchase
House purchase
Car purchase
Dream vacation
And when it comes to investing, the ultimate aim is to achieve these goals within the specified timeframe.
That means investing is not all about achieving the highest returns possible.
The highest returns come at the highest risk. And some types of risk do not add to the likelihood of positive outcome.
But even if we’re rolling dice with one hundred possible outcomes, where 99 of the possible outcomes lose money, there will still be that 1 in 100 person who lands on the lottery-winning number.
The thing is, we’re interested in achieving our goals, not staking everything on a slim chance of luck.
So that’s where long-term versus short-term investing is going to differ dramatically.
I like to think of the stock market a lot like physics. You have quantum physics on the smallest level which, from one moment to the next, is unpredictable and following from no apparent cause other than chance (whatever that is). But these outcomes on the quantum level add up to predictable averages, which become the laws we see in our day-to-day reality.
In the short-term, we don’t want to leave much up to chance, because the stock market is 99% random day-to-day.
In the intermediate-term, we can take some chances, but small and calculated, willing to give up some upside return in order to guard against the worst of potential bear markets.
In the long-term, even bear markets matter less and less. The number one importance for long-term investors (retirement, college, legacy, etc.) is that they’re invested during ALL uptrends. And that includes the very earliest stages and latest stages of bull markets, which are often the most difficult to identify in the midst of extreme pessimism or euphoria.
Most financial advisors focus on long-term planning because it aligns with their business model—keeping assets under management for extended periods. While this approach works well for retirement and legacy planning, it may not maximize opportunities for those seeking financial independence sooner.
That’s where my courses come in. I specialize in teaching investors how to capitalize on short- and intermediate-term opportunities with high-probability strategies that balance return potential with risk management. By doing so, investors can accelerate their financial growth and unlock new possibilities—whether it’s creating a personal slush fund or converting stock market gains into a thriving personal business with significantly higher return potential.
By understanding how to navigate different investment timeframes, you can take control of your financial future with confidence.
FINANCIAL TOOL
Alpha
When considering the use of an actively-managed portfolio, like a mutual fund or ETF, the alpha becomes an important consideration.
Alpha reveals whether a strategy outperformed or underperformed its passive benchmark, after adjusting for any differences in risk.
That is, for a given level of risk, did the fund managers’ decisions add or detract from the value of simply holding a passive benchmark tracker.
It’s important to note that, after fees, less than 10% of active portfolios have actually outperformed passive funds that track a benchmark over a ten-year period.
So consistent positive alpha is difficult to find.
In Morningstar and Yahoo Finance, you can view alpha as compared with the category. Sometimes the category itself is negative as well.
In the case that an entire category shows negative alpha (say, for example, large-cap value stocks), then if the ETF shows a better alpha than the category (even if it’s negative), that means the manager’s decisions added value.
You can typically view alpha over 3-, 5- and 10-year periods. The longer periods should hold a greater weight in one’s decision-making whether to use a fund or not.
In other words, negative alpha may still be a fine investment, so long as there is long-term consistency of the fund’s alpha outperforming the category or index.
Finally, alpha is only meaningful when comparing apples to apples. In other words, it wouldn’t make sense to analyze the alpha of a value stock fund in comparison with the S&P 500 (blend of growth and value stock). That wouldn’t tell you enough about the managers’ decision-making skills; it would mainly tell you how value stock as a stock style performed against the broader market.
So just make sure, when using alpha, that you are comparing the strategy with a benchmark of similar assets. Naturally, Morningstar and Yahoo Finance make this easy in their reporting.
HERE’S HOW I CAN HELP
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I’d love to hear from you. Let me know what you’d like to see in upcoming newsletters, articles, or a digital course at Contact Us - The Wealth Expedition.