Long-term investing provides you with a better chance of achieving higher returns, as it affords you the opportunity to take on more risk.
The most successful investors over the medium and long-term are the ones who follow an investment strategy that is designed to match their goals, time horizons and personal risk profile. It is important to trust one’s investment strategy and not be tempted to chop and change when uncertainty presents itself – uncertainty is a certainty.
We reveal some interesting data that supports long-term investing and draw on a recent article from Allan Gray on how to be a long-term investor.
Who is a long-term investor?
Everybody is a long-term investor. All investors need to grow their wealth throughout their lives, and the key to maximising one’s investment outcome is to invest in a strategy that will beat inflation over time, after-tax and costs.
Often investors create a deadline for their investments by saying they want to “invest for 3 or 5 years”. In fact, the investor wants to grow their money for the next 20-50 years, but they are unwilling to commit to an investment strategy for this length of time. One needs to ask themselves – what happens at the end of the 3 or 5 years? Are they going to use the money or just move to a different investment? If you don’t plan to use the money in 3 years, then it can be to your detriment to invest in a strategy that is designed for a 3-year goal, when the investment could have been invested in a suitable long-term strategy for a better outcome.
What are the benefits of having a long-term view?
The longer the investment horizon, the more risk you can afford to take. The reason for this is that your investment has time to recover from short-term declines in value, which wouldn’t be possible with a limited horizon of 3 years or less.
Studies show that timing the market has little benefit to a long-term investment. The biggest factor is holding the right portfolio asset allocation to match your goals.
Determinants of Portfolio Performance:
An investor’s asset allocation shows the percentage the portfolio holds in cash/money market, shares, bonds, and property – both locally and offshore.
The shorter the investment horizon, the more an investor should hold in cash and bonds (income assets). The longer the investment horizon, the more the investor should hold in shares, offshore assets and listed property (growth assets).
Why is it important to establish a personal risk tolerance?
The 3 aspects of risk are:
- The risk that you need to take – the risk associated with the return you need to meet your goals
- The risk that you can afford to take – the extent to which you can take risk given your financial position
- The risk that you feel comfortable taking – the level of risk you are willing to take and can tolerate.
It is important to establish your risk profile and personal attitude towards investment risk. Knowing your tolerance for risk prepares you for how you will react when the stock market goes up or down.
For example, if you invest in an aggressive investment strategy, and the value of your capital declines by 10% in the short-term, will your first instinct be to disinvest and justify this to yourself? If you know this to be true before investing, then you have established that you should not be invested in an aggressive investment strategy. An inclination to drawback to avoid short-term losses in a volatile market negatively impacts longer term returns. Hence, a more conservative investment strategy will match your personal risk tolerance more suitably than an aggressive strategy.
How to have the right long-term mindset:
“The long run is just a collection of short term runs you have to live through”.
Having a long-term view does not mean you are immune to difficult periods, such as recessions, bear markets, political changes, media noise. The long-term view will help you look through the noise and stay the course. The last 2 years is a fantastic example of this, with the arrival of the pandemic and subsequent market recovery.
“Your trust in the long run isn’t enough; your spouse and other dependants need to buy in as well.”
Investing for the long-term and staying unemotional is easier if your spouse and other dependants understand your investment strategy. This will put less pressure on you to be reactionary when the investment fluctuates in the short term.
“Long-term is less about time horizon and more about trust in your strategy and flexibility.”
Long-term investing is more of a mindset than a time horizon. “Time is compounding’s magic whose importance can’t be minimised. But the odds of success fall deepest in your favour when you mix a long time horizon with a flexible end date, or an indefinite horizon.”
We understand that long-term investing is not easy, and hence the reward for those who manage to do so successfully is material. What makes it difficult is being able to remain objective during times of negative news flow and market volatility.
A qualified and experienced investment team can assist with making difficult investment decisions and explaining the rationale and risks associated with investment decisions. Changes to an investment strategy should be made with the future in mind, and not in reaction to short-term noise.
At Investonline, we help clients by creating their personal financial plans and compiling the best investment strategy to suit their plan and risk profile.
Please click here to speak with one of our Client Portfolio Managers to see how we can assist you.