AN EXPERT-TO-EXPERT VIDEO FROM BLACKROCK FUNDAMENTAL EQUITIES

Behaving your way to investment success

21-Oct-2021
  • Blackrock Fundamental Equities

Matters of money can pull at both our intellect and our emotions. And when markets get shaky, that’s when the internal tug-of-war kicks into high gear. In our latest Expert-to-Expert video, two investment pros share strategies for keeping calm and investing on.

Episode 3: Behaving your way to investment success

Part 1: Lessons from an unusual year

Speakers:

James Bristow
BlackRock Senior Portfolio Manager Morgan Housel
Author, behavioral finance authority Carrie King

Deputy CIO of Developed Markets, BlackRock Fundamental Equities

Carrie King: Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment pros with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy.

Together they explore the topics that are driving markets and shaping investor decision-making.

Our third episode explores the art and science of investing, pairing a BlackRock expert in fundamental research and investing with an authority in behavioral finance.

In Part 1 of their three-part conversation, James Bristow and Morgan Housel reflect on living through a most unusual time in history.

James Bristow: Hello everybody. It's James Bristow here. I'm really happy to be joined here today to talk about markets with Morgan Housel, who many of you know is the author of The Psychology of Money.

And really the first subject that we're going to discuss is, it comes under the heading, this hasn't been a typical market cycle. When we look at the big drawdown we saw during COVID, and the subsequent recovery, many aspects of the regular playbook haven't really played out in this market, because it's been a unique scenario. And Morgan, I'd love to start with a question for you of, what's your sense of what you saw of how people behaved in that March 2020 period when markets took the big drawdown, and how they reacted to how information changed thereafter.

Morgan Housel: Well thank you so much for having me, James. I really appreciate the opportunity to do this It's such a good question. I think to me the biggest difference with what's happened over the last year and a half in the market, is if you compare it to 2008-2009, the last market crash, 2008 and 2009 was a financial crisis. That was the crisis, was the economic collapse. So that's what people were paying attention to. The last year and a half has been different because it was a biological crisis. It was a virus. So the stock market collapse that occurred last March was almost a sideshow at the time for most people. Because most people last March were not necessarily paying attention to their portfolio. They were saying, am I going to get a virus that's going to kill me? Can my kid go to school? Is there enough food at the grocery store? That is what people were worried about last March.

So I think for your average investor, in the United States and around the world, what most people were thinking about last March was very different from what they were thinking about in 2008. And then of course the other big difference is how quickly it all recovered. By the time that most people were back towards paying attention to the rest of the world outside of COVID last year, the market was back recovered, at an all-time high in the United States. So it's a very different fundamental than what took place in 2008.

Now if there is one quirk on this, I would say it is this. If you look at the economic crisis last year, away from the stock market but looking at unemployment, those kind of things, I think 2008 made it very easy for people to say this is bad, this is terrible, but this is a one-off crisis. This is a once-in-a-century event. Whereas now that kind of the same thing occurred with COVID, and you had another economic collapse, tens of millions of people losing their job. I think it's easier for people around the world to suddenly say, maybe this is just how the world works. Like, fool me once in 2008, but now I realize this happened again. Maybe just every 10 years the world breaks. And this is how the world works. And I actually think that's a pretty good way to think about risk, is that once per decade, roughly on average, the world breaks in a fundamental way. But I think more people believe that now than did one and 1/2 years ago.

James Bristow: Yeah I think that's right. And one of the most notable statistics I always pull out from that period is, if you look at the GDP, the macroeconomic hit in the U.S. from COVID and its current effects, we at BlackRock calculate that as being roughly a quarter of the size of the hit we saw during the GFC.

Caption: COVID crisis saw a fiscal response four times greater than during the Global Financial Crisis (GFC)

But when you look at the size of the fiscal response, and this is before all the monetary policy actions that were taken, that fiscal response was four times the size of what we saw in the GFC. So policy came to the rescue in a way that was really quite unprecedented. And I think, that again, made navigating this environment particularly tricky.

Morgan Housel: One thing that's astounding in the United States is that we have spent more money, adjusted for inflation, fighting COVID in one year than we spent fighting World War II over four years. It's just, the numbers are hard to wrap your head around, how big the policy response has been in the last year. And again, during the GFC in 2008, we in the United States spent about $800 billion. And now we're doing $2 or $3 trillion stimulus packages like it's nothing, that people don't even think about. So it's a completely different world.

James Bristow: If I sort of step back though and relate this to, what did we do and what would an individual investor do at that time, and what it's good to learn from all this? It comes back to, what is the old cliche of really having a plan?

Caption: Have a plan in place before crisis hits

That the plan for us as professional investors was, there are so many great individual companies out there whose stocks have had very significant drawdowns. Let's go through that list and see which we think are just cyclically impaired and which are more structurally impaired, and there are bargains to be had. But our plan for any drawdown always involves doing that. And for the individual investor, maybe that plan doesn't come at a stock-specific level, but it comes at the level of, how would I allocate my assets? What level of risk would I be comfortable with? So it just reinforces that fact for all of us, whether individual professional investor, to have a forward-looking plan of, here's what I'm trying to achieve, and here's what I would do in certain circumstances. And we had a great road test of that last year.

Morgan Housel: I think there's a weird thing during these crises where, when the future is the most uncertain, when you're in the midst of the deepest uncertainty, there are a lot of people who become the most certain about their views during that time.

Caption: People become most certain in their views in times of uncertainty

So you're right, that if we go back to last spring, there were people who were completely dead set on, this is what the future is going to look like. Usually in a negative way. People aren’t going to fly again, people aren’t going to go to concerts again. I just think it's an interesting quirk of behavior in these moments when you're in the trenches. That when the future is the most uncertain, that's when people lock onto their views and grab onto them really tightly.

James Bristow: You talked in a recent blog post about pandemic learnings. And you sort of highlighted three of them. The aspect of what people aren't talking about, the fact that the very concept of exponential growth is not particularly intuitive, and then I think you're surprised at how quickly businesses adapted to this new environment. Just interested which of those you'd really pull out as something that really struck you as a lesson from the pandemic and its aftermath to this point.

Morgan Housel: Yeah, I think the biggest that really struck me, and this is something that I had written about before COVID, but it just became so clear how powerful this concept is, is that risk is what you don't see. And risk is what people aren't talking about. To me, I just think it's astounding that we, in the investing field through no fault of our own, spent a decade discussing the question, what is the biggest economic risk? That's the question that takes up all the oxygen in the field. And by and large, we talked about things like interest rates, and trade wars, and profit margins, and tax cuts, et cetera, those kind of topics. And then a virus comes and 30 million people lose their jobs in two months. Like it's, in order of magnitude, greater than the risk that we had been discussing for the last decade. And I think if you look historically, it's always like that.

Caption:  The biggest risks are those we don’t see

That the biggest risk that moves the needle the most are the surprises. And I think that will always be the case. And that might be disheartening for people to hear, that like the biggest risk is what no one's talking about, but I think that's just the reality of how the world works. Because if something is a surprise, people aren't prepared for it. And if they're not prepared for it, its damage is just amplified and magnified when it arrives. So September 11th terrorist attacks, COVID-19, Pearl Harbor, or these kinds of things, that's what makes the biggest difference over your investing lifetime.

And I think just becoming more comfortable with that mindset, that forecasting is great, planning is great, having plans is absolutely essential, but the biggest news stories of the next year, of the next 10 years, over the course of the rest of our investing lives are going to be things that you and I, and anyone else, cannot be discussing right now, because they're going to be surprises. And to me that just kind of pushes room for error in your investing strategy and in your asset allocation

Ben Graham has this great quote where he said, 'The purpose of the margin of safety is to render the forecast unnecessary.' And I think that's so powerful for investing and financial planning. That if you have room for error in your analysis, in your allocations, in your budgets, you don't necessarily need to know exactly what's going to happen next.

Caption: A sound strategy should leave room for error

You can just kind of ride the waves as they come. And that to me, I think is a better way to think about and manage risk, and just a more realistic way to manage risk, than assuming that we know exactly what's going to happen next.

Carrie King: James and Morgan covered a lot of ground. One concept that stood out to me: Have a plan before crisis strikes.

This can help you to better weather the market’s ups and downs, without letting your emotions lead you astray.

We hope you’ll tune into Part 2 of our behavioral finance series where James and Morgan dig deeper into the role of emotions in investment decision-making.

DISCLOSURE

Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important information

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 –549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

For qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ('FinSA'). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa

For investors in Israel: BlackRock Investment Management (UK) Limited is not licenced under Israel's Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder.

South Africa:

Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

AEH1021E/S-1882277-5/6

Episode 3: Behaving your way to investment success

Part 1: Lessons from an unusual year

Speakers:

James Bristow
BlackRock Senior Portfolio Manager Morgan Housel
Author, behavioral finance authority Carrie King

Deputy CIO of Developed Markets, BlackRock Fundamental Equities

Carrie King: Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment pros with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy.

Together they explore the topics that are driving markets and shaping investor decision-making.

Our third episode explores the art and science of investing, pairing a BlackRock expert in fundamental research and investing with an authority in behavioral finance.

In Part 1 of their three-part conversation, James Bristow and Morgan Housel reflect on living through a most unusual time in history.

James Bristow: Hello everybody. It's James Bristow here. I'm really happy to be joined here today to talk about markets with Morgan Housel, who many of you know is the author of The Psychology of Money.

And really the first subject that we're going to discuss is, it comes under the heading, this hasn't been a typical market cycle. When we look at the big drawdown we saw during COVID, and the subsequent recovery, many aspects of the regular playbook haven't really played out in this market, because it's been a unique scenario. And Morgan, I'd love to start with a question for you of, what's your sense of what you saw of how people behaved in that March 2020 period when markets took the big drawdown, and how they reacted to how information changed thereafter.

Morgan Housel: Well thank you so much for having me, James. I really appreciate the opportunity to do this It's such a good question. I think to me the biggest difference with what's happened over the last year and a half in the market, is if you compare it to 2008-2009, the last market crash, 2008 and 2009 was a financial crisis. That was the crisis, was the economic collapse. So that's what people were paying attention to. The last year and a half has been different because it was a biological crisis. It was a virus. So the stock market collapse that occurred last March was almost a sideshow at the time for most people. Because most people last March were not necessarily paying attention to their portfolio. They were saying, am I going to get a virus that's going to kill me? Can my kid go to school? Is there enough food at the grocery store? That is what people were worried about last March.

So I think for your average investor, in the United States and around the world, what most people were thinking about last March was very different from what they were thinking about in 2008. And then of course the other big difference is how quickly it all recovered. By the time that most people were back towards paying attention to the rest of the world outside of COVID last year, the market was back recovered, at an all-time high in the United States. So it's a very different fundamental than what took place in 2008.

Now if there is one quirk on this, I would say it is this. If you look at the economic crisis last year, away from the stock market but looking at unemployment, those kind of things, I think 2008 made it very easy for people to say this is bad, this is terrible, but this is a one-off crisis. This is a once-in-a-century event. Whereas now that kind of the same thing occurred with COVID, and you had another economic collapse, tens of millions of people losing their job. I think it's easier for people around the world to suddenly say, maybe this is just how the world works. Like, fool me once in 2008, but now I realize this happened again. Maybe just every 10 years the world breaks. And this is how the world works. And I actually think that's a pretty good way to think about risk, is that once per decade, roughly on average, the world breaks in a fundamental way. But I think more people believe that now than did one and 1/2 years ago.

James Bristow: Yeah I think that's right. And one of the most notable statistics I always pull out from that period is, if you look at the GDP, the macroeconomic hit in the U.S. from COVID and its current effects, we at BlackRock calculate that as being roughly a quarter of the size of the hit we saw during the GFC.

Caption: COVID crisis saw a fiscal response four times greater than during the Global Financial Crisis (GFC)

But when you look at the size of the fiscal response, and this is before all the monetary policy actions that were taken, that fiscal response was four times the size of what we saw in the GFC. So policy came to the rescue in a way that was really quite unprecedented. And I think, that again, made navigating this environment particularly tricky.

Morgan Housel: One thing that's astounding in the United States is that we have spent more money, adjusted for inflation, fighting COVID in one year than we spent fighting World War II over four years. It's just, the numbers are hard to wrap your head around, how big the policy response has been in the last year. And again, during the GFC in 2008, we in the United States spent about $800 billion. And now we're doing $2 or $3 trillion stimulus packages like it's nothing, that people don't even think about. So it's a completely different world.

James Bristow: If I sort of step back though and relate this to, what did we do and what would an individual investor do at that time, and what it's good to learn from all this? It comes back to, what is the old cliche of really having a plan?

Caption: Have a plan in place before crisis hits

That the plan for us as professional investors was, there are so many great individual companies out there whose stocks have had very significant drawdowns. Let's go through that list and see which we think are just cyclically impaired and which are more structurally impaired, and there are bargains to be had. But our plan for any drawdown always involves doing that. And for the individual investor, maybe that plan doesn't come at a stock-specific level, but it comes at the level of, how would I allocate my assets? What level of risk would I be comfortable with? So it just reinforces that fact for all of us, whether individual professional investor, to have a forward-looking plan of, here's what I'm trying to achieve, and here's what I would do in certain circumstances. And we had a great road test of that last year.

Morgan Housel: I think there's a weird thing during these crises where, when the future is the most uncertain, when you're in the midst of the deepest uncertainty, there are a lot of people who become the most certain about their views during that time.

Caption: People become most certain in their views in times of uncertainty

So you're right, that if we go back to last spring, there were people who were completely dead set on, this is what the future is going to look like. Usually in a negative way. People aren’t going to fly again, people aren’t going to go to concerts again. I just think it's an interesting quirk of behavior in these moments when you're in the trenches. That when the future is the most uncertain, that's when people lock onto their views and grab onto them really tightly.

James Bristow: You talked in a recent blog post about pandemic learnings. And you sort of highlighted three of them. The aspect of what people aren't talking about, the fact that the very concept of exponential growth is not particularly intuitive, and then I think you're surprised at how quickly businesses adapted to this new environment. Just interested which of those you'd really pull out as something that really struck you as a lesson from the pandemic and its aftermath to this point.

Morgan Housel: Yeah, I think the biggest that really struck me, and this is something that I had written about before COVID, but it just became so clear how powerful this concept is, is that risk is what you don't see. And risk is what people aren't talking about. To me, I just think it's astounding that we, in the investing field through no fault of our own, spent a decade discussing the question, what is the biggest economic risk? That's the question that takes up all the oxygen in the field. And by and large, we talked about things like interest rates, and trade wars, and profit margins, and tax cuts, et cetera, those kind of topics. And then a virus comes and 30 million people lose their jobs in two months. Like it's, in order of magnitude, greater than the risk that we had been discussing for the last decade. And I think if you look historically, it's always like that.

Caption:  The biggest risks are those we don’t see

That the biggest risk that moves the needle the most are the surprises. And I think that will always be the case. And that might be disheartening for people to hear, that like the biggest risk is what no one's talking about, but I think that's just the reality of how the world works. Because if something is a surprise, people aren't prepared for it. And if they're not prepared for it, its damage is just amplified and magnified when it arrives. So September 11th terrorist attacks, COVID-19, Pearl Harbor, or these kinds of things, that's what makes the biggest difference over your investing lifetime.

And I think just becoming more comfortable with that mindset, that forecasting is great, planning is great, having plans is absolutely essential, but the biggest news stories of the next year, of the next 10 years, over the course of the rest of our investing lives are going to be things that you and I, and anyone else, cannot be discussing right now, because they're going to be surprises. And to me that just kind of pushes room for error in your investing strategy and in your asset allocation

Ben Graham has this great quote where he said, 'The purpose of the margin of safety is to render the forecast unnecessary.' And I think that's so powerful for investing and financial planning. That if you have room for error in your analysis, in your allocations, in your budgets, you don't necessarily need to know exactly what's going to happen next.

Caption: A sound strategy should leave room for error

You can just kind of ride the waves as they come. And that to me, I think is a better way to think about and manage risk, and just a more realistic way to manage risk, than assuming that we know exactly what's going to happen next.

Carrie King: James and Morgan covered a lot of ground. One concept that stood out to me: Have a plan before crisis strikes.

This can help you to better weather the market’s ups and downs, without letting your emotions lead you astray.

We hope you’ll tune into Part 2 of our behavioral finance series where James and Morgan dig deeper into the role of emotions in investment decision-making.

DISCLOSURE

Risk warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important information

In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 –549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded.

For qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ('FinSA'). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa

For investors in Israel: BlackRock Investment Management (UK) Limited is not licenced under Israel's Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder.

South Africa:

Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

AEH1021E/S-1882277-5/6

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.


It’s easy to focus on the negative. In fact, it’s the human tendency. We see some of this manifesting in markets today. After a swift and strong run for equities since the COVID-crisis lows, some investors are turning their attention to what can go wrong.

Yet there’s still plenty to go right. That’s according to international equity investor James Bristow and Morgan Housel, author of The Psychology of Money. The two recently got together for a robust conversation that not only considered the potential bright spots in the outlook, but also the lessons to be gleaned from the pandemic and how to balance the emotion and science of investing.

When it comes to maintaining perspective and ensuring your emotions don’t lead you astray when markets get choppy, they offer this advice:

Have a plan

All of us, whether individual or professional investor, should have a forward-looking plan, says Mr. Bristow. It should consider “here's what I'm trying to achieve, and here's what I would do in certain circumstances.” Having a well-thought-out plan should provide guardrails and offer some measure of solace, forestalling emotional reactions when markets get dicey.

Yet it’s also important to get comfortable with the idea that not every scenario can be foreseen or planned for. A once-in-a-century global pandemic is a prime example.

“Having plans is absolutely essential,” says Mr. Housel, “but the biggest news stories of the next year, of the next 10 years, over the course of the rest of our investing lives, are going to be things that you and I, and anyone else, cannot be discussing right now, because they're going to be surprises.”

How can investors manage around this grim reality? Incorporate a margin of error into your plan.

“If you have room for error in your analysis, in your allocations, in your budgets, you don't necessarily need to know exactly what's going to happen next,” Mr. Housel explains. “That to me is just a more realistic way to manage risk than assuming that we know exactly what's going to happen next.”

In the end, no one saw the COVID crisis coming, but neither could we have predicted the magnitude of the recovery. A margin of error leaves room to ride the waves, even the entirely unexpected ones.

Follow your playbook, not the crowd

As a participant in BlackRock’s behavioral finance project, Mr. Bristow has grown increasingly attuned to how individual psychology can affect investment decision-making.

“One of the things I and my team have done for many years is just to try to understand ourselves better. And it requires a willingness to be a little bit self-critical … to look back on your actions and find room for improvement.”

To “know thyself” is critical, yet there are popular undercurrents in markets that can lead to crowd mentality, causing some investors to set aside self-awareness and stray from their plan.

Mr. Housel’s advice: Realize that everyone is playing a different game. “If you assume that investing is one game, that everyone has the same time horizon, the same goals, [that] they want the same outcomes, then there should be one set of rules, and one strategy that's likely to work,” he says. “But people play completely different games.

“Does it make sense to dump your stocks if inflation rises by 10 basis points? If you're a long-term investor, no. If you're a day trader, maybe.”

Ultimately, what is “rational” depends on the game you’re in. Don’t assume you should be playing by others’ rules.

Be patient, but not stubborn

“The power of compounding,” Mr. Bristow asserts, is “clear, obvious and necessary for all of us.” And achieving greatest benefit from compound interest requires one critical element: time.

The hypothetical illustration below shows the profound impact of staying invested over 10 years versus five.

Hypothetical growth of $100,000, assuming 10% annual yield

Hypothetical growth of $100,000 assuming 10% annual yield

Source: BlackRock, as of Dec. 31, 2020. For illustrative purposes only.

There's nothing more powerful that exists in this industry than just increasing the amount of time that you are investing for.

Morgan Housel

Yet there can be a tension between having a long-term mindset and getting entrenched in a view that is fated for failure ― aka stubbornness.

The key to walking this fine line: Know that patience and compounding are the fundamental cornerstones of investing. But also know that the world is constantly changing ― and be willing to question your view.

Our two experts agree that it’s important to study the short term to understand if it may be important in the long run.

Mr. Bristow credits BlackRock for helping him to maintain this balance: a mentality and culture for long-term investing alongside the mechanisms needed to assess the short term and identify any threats to your long-term central thesis.

“It's not enough to just set the view, and then go away and hide in your bunker for 20 years and come out the other side,” he says. “You've always got to be reassessing it.”

This is a key virtue of active management ― taking active, short-term steps in pursuit of long-term goals.

Mr. Housel sums it up well: Following and understanding what's going on in the short run is not counterproductive to long-term thinking. It's essential to long-term thinking and, ultimately, to enduring emotionally and financially across time.

James Bristow
Managing Director and portfolio manager