Rate of Change

Children are a great reminder of how quickly time passes and how much things change over time. My son turned 14 in January, and I am having a hard time believing he is that old already. The amount of food he consumes seems to have grown exponentially with his age.

I’ve also noticed a change in the rate of change. At this age, it seems, the changes come faster every day.

As investors, measuring the rate of change is a big part of what we do each day. We monitor the rate at which economic data changes, how quickly asset prices move in either direction and the sentiment of investors. This is most often done across multiple time periods—such as days, weeks, months or calendar quarters—because differences among these rates may offer important insights.

Using the information we have to make decisions grows ever more complex as more information becomes available. It’s all too easy to get caught up in the real-time data, whether that’s mobile phone data, TSA check-ins or Open Table reservations. Giving attention to rates of change—not just the current value itself—helps maintain a broad context about what’s happening in the markets.

Rate of change is such a big part of the industry that there is a whole financial technology industry built around capturing that information and presenting to investors who use it to make decisions. Of course, that has resulted in so much data being available that there is a need to discern what is important from what is just interesting.

Useful Time Horizon

As an investor, you have a time horizon. Applying that value can be useful when evaluating information and determining over what period of time data should be examined.

As an example, if you are a “day trader,” your investment time horizon is between the open and close of each business day. So, evaluating stock price movements in increments of minutes and hours makes much more sense than using only days, weeks and months.

As a day trader, you may pay attention to what economic data is being released on a given day and what time that report takes place to understand what impact it may have on markets, but your interest is fleeting. New information on the level of retail sales or inflation only matters to you in the moment.

Contrast that with someone whose time horizon is years. Now, understanding global macro- economic trends on a broader scale has value. You may benefit from thinking about which parts of the global economy and markets will benefit from those long-term trends…and if any may be detrimental to your current positioning.

A long-term perspective on data may also allow you to look past the near-term volatility in asset prices as you understand that investments are being made for years, decades even, and that you have chosen this time horizon because it fits within a broader financial plan used to meet goals you may have well into the future.

In Practice

As an example, I began putting money away for my son’s education when he was one-week old. That portfolio has grown due to regular contributions and a 100% allocation to the stock market.

In the very first year, this portfolio lost half of its value due to the financial crisis. Knowing that the fund’s use was almost 20 years hence, I considered this reduction disconcerting but not unmanageable. I kept in mind his age.

So, whether economic data from one week or month to the next rose or fell didn’t matter much. What was important though were the macro trends forming around the internet of things. These trends have produced what are now some of the largest technology companies. For example, Microsoft has risen 679% since I originally invested in it for my son’s account. But in the first eight years of its holding, Microsoft was a laggard. I regularly questioned the purchase until seeing the benefits of their cloud business growth.

Now, as my son approaches the start of higher education, I must consider whether the risk inherent in stocks warrants the same 100% stocks allocation. That’s an example of the time horizon shifting. Maintaining perspective about the time horizon is critical to successful outcomes. This is one reason working with a financial advisor can be so helpful. Part of the advisor’s role is to stay objective about your portfolio and how well it matches up to your individual situation.

In my case, with just four years to go until my son’s account is put to use, I admit to wishing I had that money today to pay for food!

ABOUT THE AUTHOR

Brian Andrew

Chief Investment Officer | Johnson Financial Group

As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.