Despite the differences of objective between short-term and long-term investing, people too often invest their money in the same way, regardless of their time horizon. With disastrous results of course.
Since the goals of a long-term investment are different from those of a short-term investment, the mindsets too should be different. Changing one's mindset is one of the hardest things to accomplish for beginners.
I need $1200 to go on holiday in a year. So I set aside $100 per month. It is out of the question to risk having only $1000 just for a chance to have $1500: I want the money I set aside to still be there when I come back. It is the short-term mindset: not losing the money set aside.
If in the short term one tries mostly not to lose money, in the long run one must try to gain. Two consequences:
In the short term, the main risk is a sharp fall in the value of your investments — a stock market crash for example. Volatility is what is generally called the risk. It is very visible and it is very scary.
Those who leave their money in a savings account do not see so clearly the losses due to inflation, nor the losses of opportunity due to a low return. Short-term risks are very visible, but long-term risks are far less so.
In the short term, the impacts of inflation and low returns are weak compared to a potential fall of stock prices by over a third. But these risks, negligible in the short term, are the worst for investors planning for retirement. For the long term, the risk is a low real net return — the enemies are thus low returns (savings accounts, bonds), high fees and inflation.
Too many people have a long-term objective (such as preparing for retirement), but a short-term mindset. They do not invest their money over 20 years, but 20 times over a year (if not 7305 times over a day). Their states of mind (and thus their behaviors) do not match what they are trying to accomplish.
As they do not take account of inflation, they think savings accounts and bonds are the safest investments. As they are obsessed with the idea that the value of their investment could go down, if only for an hour, they do not pay attention to the profitability of their investments over the long term.
