Do you suffer from Time Frame Confusion?

That question came up recently after a media appearance where the host asked about a specific stock (which we did not own). The way this investor asked the question was “You mentioned this stock could do THIS — how does that square with your long term view of THAT?”

The short answer is that most of our clients’ investment profiles are looking out years or even decades, but the anchor asked what was essentially a trading question.

Consider for a moment what your time frame is and you will figure out what your answer should be. Indeed, much investor confusion (and many investor errors) involve making the mistake of investing for one time frame and behaving in another.

Perhaps a few examples might help to illustrate this.

The classic rule “Never turn as trade into an investment or an investment into a trade” reveals the shifting of time frames for the exact wrong reasons. If your time frame is that of a trader — you are seeking to take advantage of volatility of daily price fluctuations — then you stick to your expected holding period. Any trader who extends this into a longer frame (usually because the trade went against them) is making a classic error. How many traders who shift a trade into a buy have done the requisite research, thought process, and planning for a longer term hold?

Investors make a similar mistake. They own something with an expected multi-year holding period, only to bounce on some very short term news — a critical review of a product, a negative research report, a 5% price drop. I doubt any of these investors has in their plan “I will sell XYZ if an analyst downgrades the stock.

Good investors must learn to contextualize (i.e., mostly ignore) the Daily Background Noise. That is my phrase for the never ending proliferation of economic releases, media broadcasts, technical updates, etc. that are more or less meaningless time fillers. Television and radio have 24 hours per day to fill — do you believe that all of that content is meaningful? Newspapers and magazines have a specific number of pages that requires ink be spilled on them — are they all worth your time to read? The modern internet has an infinite number of pages to fill (guess how many are truly valuable).

Consider these various time frames, and what they mean to your investing or trading approach:

Minute-to-minute: A very noisy and constant flow of prices, rumors, and chatter about stocks; if you are a day trader, then this is your pond. If you are an investor, there is nothing more meaningless to you.

Hourly: Similar to minute flow, with opening and closing behavior (“strong open in XYZ” or “I hate the way the ABC closed”) and a similar fractal chart.

Daily: Very noisy. Filled with random gains and losses, driven mostly by the overall market (my guess 35%) or the equity’s sector (~30%).

Weekly:  Begins to smooth out the noise factor. Informative charts, overall trend beginning to develop. Still contains lots of noisy economic chatter.

Monthly: Provides a window into secular cycles. Most traders ignore the monthly charts — too slow they say — but these can give you some insight into real (versus false) reversals.

Quarterly: Valuation data comes into focus via earnings. Longer term view allows potential mean reversion to be taken advantage of  (via re-balancing).

Annual: For retirement planning, and life events. Yearly data puts the rest of the noise into perspective. Most of the daily or even weekly up and down movements get smoothed out. Ultimately, where long term investors should be focused.

Decades: The market historian’s friend.


What’s your time frame like?


Category: Apprenticed Investor, Financial Press, Investing, Psychology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Why Time Frames Matter to You”

  1. PeterR says:

    “One is looking out over this week only, and it should be KNOWN that the SPX high at 1576 does indeed fall within my parameters for lighting the fuses for both fear and greed.”

    SPX 1600+ — then one starts the 20% correction for Sell In May and Go Away?

    2001 – A Space Odyssey

  2. [...] Ritholtz writes about “Time Frame Confusion” - a problem most traders [...]

  3. mathman says:

    oh man, BR – check this out (it’s exactly what you’ve posted here with a bit of rigor thrown in; stay to the end where he extrapolates his theory to companies – it’s fascinating and astounding if you’re a geek like me):

    Geoffrey West on COMPLEXITY

    (41 min vid)

  4. kek says:

    Beautiful post Barry. It has been my experience that the largest factor in sup par real life returns has been due to bad investor behavior, where quality long term portfolios get blown up by short term impulsive behavior.

  5. CSF says:

    I wonder if “time frame confusion” using ETFs is a little different than with individual stocks. On the one hand, ETFs help the investor see past the day-to-day, company specific noise. They smoothen the volatility and allow the investor to focus on the medium-to-long term. On the other hand, as the whole market sells off, the ETF investor can’t say: “I’m holding these shares because I believe in the company’s fundamentals and future prospects.” The best the ETF investor can do is say: “I’m maintaining this core allocation because I’m a long-term investor, and market timing is hard to get right.” It might be more difficult to maintain a buy-and-hold mindset with ETFs.

  6. RW says:

    Since I took Harry Browne’s advice (sometime in the late 1980′s) to separate savings (strategic) and investing/trading (tactical) portfolios, time frame depends on which portfolio I am working with: The former has a yearly frame, the latter is monthly or weekly (often both in ratio, convergence/divergence, etc).

    Day trading is crazy making and I don’t fool with it but sometimes a stop on a swing trade will kick me out so quickly it can look that way from the outside.

  7. Hantra says:

    You see lots of posts and articles saying “buy and hold” is dead, and it’s a horrible strategy. But doesn’t the “annual” time frame suggest a buy and hold strategy?

    The question only concerns long term investors.


  8. catman says:

    My default chart is the 5 year monthly with a ten period moving average. The big picture.

  9. wally says:

    “Investors make a similar mistake. They own something with an expected multi-year holding period, only to bounce on some very short term news — a critical review of a product, a negative research report, a 5% price drop.”

    How does this square with advice to set stop-losses? I think I’m an investor, but I also got out of equities in 2007-2008, largely because of things I read on boards like this one. I’m better off today as an investor because I DID alter my behavior and time frame then. I don’t believe there is any rule or guideline, ever, that can always be applied. You have to keep your eyes open and adjust to a reality that is always changing.

  10. WFTA says:

    I’ve simplified it further: I own everything at the wrong time.

  11. digistar says:

    Investing long term in anything that you are not personally involved with, and have some control over, seems like a quaint concept to me. There is too much criminal behavior in government and business; too much Fed intervention; too much macro uncertainty globally; etc.

  12. idaman says:

    I like the way SigFig charts the relative strength of your total holdings in all your accounts. The shortest time frame is three days. It really jolts you at first because yo can’t really see how you are doing TODAY. It’s a small tweak, but quite smart – and effective and controlling that ‘how am I doing today’ urge.

  13. [...] your investment time frame matters so much.  (Big Picture also Random [...]

  14. faulkner says:

    Coming late to this (longer time frame – ha), with two additional points.

    First, while the time frame of observation/market indicator can vary from milliseconds to years, the time frame of execution (for many traders and investors) is immediate. Without predetermined entry and exit strategies – which are rigorously followed – this shift of attention turns trader and investor shorter term.

    Second, the more often the appropriate trading/investing time frames are violated – “Never turn as trade into an investment or an investment into a trade” – the fuzzier the mental picture the trader/investor will have of their actual strategy. At this point they need to stop, re-establish the original strategy, and find indicators and execution strategies that support it. Contrary to felt experience, cognition tends to follow behavior, not the other way round. In other words, develop trading/investing habits that keep you in your appropriate time frame. Some of the other comments provide some nice examples.

  15. [...] have been thinking about nothing recently, mostly in the context of time frames (a post I did a few weeks ago, expanded into a full column for [...]