Is it really better to be long-term rather than short-term focused when it comes to business leadership, finance, or career strategy? That depends.
The decade-long bull market has had a couple of major rough spots – one lasting more than a year, actually. If you panicked and sold, you blew it. But if you were patient and hung in there, you were richly rewarded. The S&P 500 index nearly tripled over that time.
That said, if you’re going to need lots of cash to say buy a house or start a business in the near term, you can’t necessarily play the long game from an investment standpoint, now can you?
Investing isn’t the only activity where often-overlooked factors of risk tolerance and time horizon play critical roles. Every executive, business leader and career-minded individual knows what I’m talking about. At least they should.
President Trump recently asked the SEC to consider lengthening reporting requirements from quarterly to semiannual to encourage long-term planning. While that might seem to make sense on the surface, the change would be completely unnecessary, at least in my view.
SEC requirement or not, public companies should review the state of their business quarterly and shareholders have a right to know how they’re doing. That’s a no-brainer. As for executives being overly focused on the effect of earnings results on share price, that’s another no-brainer: they shouldn’t. In general, corporate officers and directors should always play the long game.
Startups and small businesses, on the other hand, are more likely to have near-term cash-flow, capital raise and product/sales milestone issues. That require a more hands-on approach to finance and a higher tolerance for risk over a shorter time horizon. That’s just the way it is.
It’s the same with career strategy. When you’re just starting out, you’ve got plenty of time to cast a wide net, try your hand at different disciplines and work for lots of companies to gain experience and figure out what you want to focus on. So your risk tolerance should be relatively high and your time horizon long.
That should change as you get older. Not because you’re any less mobile, adaptable, curious or capable, but from a purely practical standpoint you simply have fewer opportunities left in you and you need to plan for retirement or at least lower wages. So your tolerance for risk should be lower and your time horizon shorter.
It’s a lot like playing poker. If you’re going to be playing for many, many years, you can afford to make some risky bets to push the envelope and learn the ropes. But if you’re only going to be playing for a brief time, you’ll want to make sure you make the right bets on the right hands so probability works out over a shorter time horizon.
There are plenty of other ways in which risk tolerance and time horizon come into play in strategic planning, financial planning and whatnot, but I’m sure you get the point. Making important career, business or financial decisions without taking risk tolerance and time horizon into account adds unnecessary failure risk. In other words, it’s just plain dumb.
Image credit masaru minoya via Flickr