Mistaking Your Time Frame for Someone Else’s

Of all the errors I’ve personally committed in my career and continue to see others fall victim to, mistaking one’s own time frame for someone else’s is perhaps the most frequent. Everyone does it.

Barry Ritholtz’s column at the Washington Post this weekend covers the topic, and includes this helpful breakdown:

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; this is the realm of day traders, Twitter and institutional desks. If you are an investor, nothing is more meaningless to you than this time frame.

Hourly: Similar to minute flow, only now we can add how the stock opens or closes. Traders can be heard to say things like “strong open in XYZ” or “I hate the way the ABC closed.”

Daily: Filled with random gains and losses, driven mostly by the overall market (my guess 35 percent) or the equity’s sector (about 30 percent). News flow often pushes prices in one direction, only to quickly reverse after a short period. Still reflects economic and other noise overall.

Weekly: Informative charts: Overall trend begins to show. Begins to smooth out the random movements. Noise factor considerably less. Good way to think about cyclical markets (i.e., two to five years).

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

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

Annual: For retirement planning and life events. Yearly data put the rest of the noise into perspective. Most of the weekly or monthly random up-and-down movements get smoothed out. Ultimately, this is where long-term investors should be focused.

Decades: The market historian’s friend.

Head over for the whole discussion:

A crucial investing question: Do you know your time frame? (WaPo)