Tomorrow Is a New Day

Story Highlights:

• It's human nature to ascribe significance to calendar years.
• Sometimes anchoring provides a sense of "starting fresh" and can be a positive psychological boost.
• But overly focusing on one year's calendar returns—good or bad—could be detrimental if they cause investors to veer from disciplined, long-term portfolio strategies.

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The champagne's been popped and the celebratory din a now-muted memory. One year makes way for the next, and so life marches forward. New years are notable—all sorts of things reset on January 1st, but for markets, a calendar is no more than a psychological construct. It's human nature that causes us to anchor significance to calendar years—but what's really materially different between today and yesterday?

Calendars provide us a sense of order and progress—without which days would silently meld into months and years. Of course, the physical movement of the solar system makes 24 hours a day, 30 (or 31) days a month, and 365 days a year. Markets know nothing of these things, yet our attachment to those milestones, for better or worse, shapes our lives and often our outlooks.

To some, the idea of a new year brings a sense of renewal—of shedding the old and preparing for the new. It's when we set our sights on new horizons and dare to voice ambitious resolutions—rites underpinned by our own perception of time passing. The sense of "starting fresh" is a positive psychological boost, perhaps one especially important after such a tumultuous and overwhelmingly pessimistic year.

Year-end can also signal reflection, which often involves something akin to tallying numbers on a mental scorecard. Our psychological framing of time leads us to monitor certain things on a monthly basis, some on a semi-annual basis, and others annually. Investors tend to focus heavily on annual portfolio returns. Which in itself is fine—one has to stop and measure performance somewhere, and a calendar year may as well be the way. Yet nothing really justifies why more value should be placed on portfolio performance moored to 365 days rather than another length of time, or the period between January and December rather than March through February.

Most investors have investing time horizons of 10, 20, 30 or more years and needn't emphasize one year's return. Yet they do—especially in times like these. Somehow, even the longest-term investors suddenly become ultra short-term focused. That 2009 has dawned doesn't free us from the financial carnage of 2008, but 2008's events don't have to anchor us there forever either. Tomorrow is just as connected to yesterday as it ever was, and yet tomorrow is also as free to push ahead.

Indeed, overly focusing on one year's terrible calendar returns could be detrimental if they cause investors to veer from long-term portfolio strategies. It's no secret this year was one of the worst for stocks. But history shows stocks have always recovered from bear markets to even higher levels and over long time periods, beat all other asset classes. To change course based solely on results anchored to a past year could mean never reaching your voyage's objectives.

With any perceived transitional time period, there's a desire for change. Change can propel us to new heights, but also clip our wings if done for the sake of change alone. The wisdom to discern between the two is thankfully, hopefully, developed with time.