Capital Markets Prioritise the Near Term, & the Data Proves It Getting Worse

Growing wealth is never a near-term prospect.  It requires planning over an extended investment horizon, one that accounts for untoward challenges such as economic downturns, the 2020 pandemic lockdown among the most recent examples.  Most people lack wealth, many lack savings, and some lack income entirely.  Financial planning for the long term must therefore start from income, move to savings, and only then address wealth accumulation as the final stage, not the first.

Why Income Disparity becomes Political Instability

These challenges, addressed poorly at the policy level, compound into entrenched income disparity.  Wealthier individuals access greater opportunity, better financial education, and multi-generational networking advantages that widen rather than narrow over time.  When that disparity grows too large, entire sections of a community become disenfranchised, no longer feeling like genuine stakeholders in collective prosperity.  Economic instability, left unaddressed, becomes political instability, a pattern history has demonstrated repeatedly and recently.

The Investment Horizon Mismatch, Quantified

Addressing disparity at the societal level is a policymaker’s job.  Getting proper financial advice remains the individual’s own responsibility, and the fundamental function of that advice is converting income into savings, then savings into managed, growing wealth.  The extended investment horizon required by individuals and households is measured in decades.  The instruments available to hold that wealth are not built on the same timescale, and the data on this has only worsened since this contention was first made.

The average holding period for a stock on the New York Stock Exchange sat at roughly eight years in the 1950s.  By June 2020, it had collapsed to just 5.5 months, down from 8.5 months in 2019 and 14 months in 1999.  High-frequency trading now accounts for roughly half of all US equity trading volume.  Companies themselves have shortened their own lifespans within the index: average tenure on the S&P 500 stood at 35 years in 1970, fell to 20 years by 2018, and is projected to drop below 15 years by 2030.  An individual saving for a retirement thirty years away is, in practice, having those savings managed inside instruments whose own operators are thinking in months, not decades.  That mismatch is not a rounding error.  It is the entire structural problem.

Why Fund Managers Behave This Way

Fund managers are compensated annually, frequently against short-term performance benchmarks, which creates a direct financial incentive to prioritise near-term gains regardless of a client’s actual decades-long horizon.  Holding assets to meet a genuinely long-term objective, rather than realising gains within the manager’s own compensation cycle, puts the client at a real, measurable opportunity cost.  Investment decisions optimised for the fund manager’s shorter horizon disadvantage the saver’s longer one, and the incentive structure ensures this happens systematically, not occasionally.

Companies allocate capital to long-term and short-term needs just as households do, and capital markets penalise the long-term allocation identically.  Companies also carry currency and political risk exposure that households never face, compounding the loss.  A company investing over the long term typically works to a seven-to-ten-year horizon.  The market’s dollar-weighted average holding period for standard asset classes – equities, property, futures – sits at five years at most, and considerably shorter in money markets.  Only debt instruments run longer, and they fail to keep pace with inflation over that period, because compensating for inflation was never their design purpose.

The Numbers That Prove Long-Term Thinking Actually Wins

Here is the part the short-termist consensus consistently ignores.  McKinsey and FCLTGlobal jointly analysed 615 large and mid-cap US publicly listed companies from 2001 to 2015, building a Corporate Horizon Index to distinguish long-term from short-term firms based on investment patterns, growth, and earnings quality.  Long-term companies achieved 47% higher revenue and 36% higher earnings than their short-term counterparts.  Their total shareholder return carried a 50% greater likelihood of landing in the top decile or top quartile by 2014.  Long-term firms added nearly 12,000 more jobs on average between 2001 and 2015 than their peers.  Had every firm in the study matched that job creation rate, the American economy would have added over five million additional jobs, unlocking value FCLTGlobal estimated at more than one trillion dollars in forgone GDP over the following decade, potentially reaching three trillion dollars by 2025.  Short-termism is not a matter of taste.  It is a quantified, multi-trillion-dollar drag on the real economy.

Paul Polman became CEO of Unilever in January 2009, in the depths of the global financial crisis, and made a decision boardrooms still cite as a case study.  He scrapped quarterly earnings guidance entirely, telling shareholders Unilever would no longer manage itself to the ninety-day cycle.  The market’s immediate verdict was brutal: Unilever’s share price fell 8% on the day of the announcement.  Polman held his position, redirected capital toward capital expenditure, staff training, IT systems, and brand investment that quarterly reporting had previously suppressed, and restructured executive compensation around long-term outcomes rather than quarterly targets.  He went further in 2017, rejecting a hostile takeover bid from Kraft Heinz specifically to protect that long-term orientation from an acquirer known for aggressive cost-cutting.  Over his ten-year tenure, Unilever delivered a total shareholder return of 290%.  The market punished the announcement by 8% on day one.  It rewarded the underlying discipline by roughly thirty-six times that amount over the following decade.  That is the actual trade-off short-termism obscures: a real, short-run cost, in exchange for a considerably larger long-run gain that quarterly capitalism structurally discourages every company from attempting.

The Cyclical Consequence

This near-term focus produces exactly the cyclical bubbles and periodic crashes markets have repeatedly demonstrated, tolerated because those controlling the largest pools of capital use every downturn to seize market share, fuelling the next cycle of instability until a crash forces intervention.  A properly regulated market would see asset managers and owners investing to match the genuine long-term horizons of households, pension funds, and family trusts, and would encourage companies to invest in infrastructure and product development rather than prioritising buybacks and short-term shareholder returns.  That is not the market currently operating in the United States, Singapore, or most developed economies.

The investment horizon gap must be addressed aggressively at every level.  Policymakers need targeted regulation curbing speculative excess, genuine dialogue with market stakeholders, and a calibrated mix of incentive and constraint to shift market behaviour in a measurable direction.  Companies need to pursue long-term strategic growth deliberately, building toward it through consistent daily operational decisions rather than quarter-to-quarter share price management; Polman’s Unilever being the standing proof this survives contact with an actual hostile market reaction.  Fund and investment managers need to recognise, and price correctly, the genuine market demand for long-term horizon products, particularly given the accelerating disruption risk from climate change, ageing demographics, and technological transformation, the fourth industrial revolution giving way to whatever the quantum computing era brings next.  Compensation structures across the asset management industry need restructuring specifically to reward long-term gains over short-term profit-taking, rather than the reverse.

For individuals and households, the fix starts with access to a genuinely better class of financial advisor, one capable of translating financial education into an actual match between a client’s real needs and what the market currently offers, adjusting strategy honestly when a longer horizon simply is not available.  Retirement planning needs to account properly for critical illness risk and medical inflation over that same extended horizon.  Financial literacy is not a box ticked once.  It is an ongoing process, and that process applies as much to the advisors dispensing the guidance as it does to the households receiving it.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code