The case for long term investing
They say patience is a virtue, but it’s never easy to hold on to your investments and see it to maturity over the long term. Short-term trends, market noise and behavioural biases in investing are often distractions that get in the way of our long term investment goals.
In this age of smart phones and technology, it is increasingly a challenge to stay idle.
There’s always the temptation to switch out of equities when the news headlines turn negative and buy back in when the market is in calmer waters.
But, less is really more. Compared with short-term trading, long-term investing has usually proved to be a more successful approach in building up a nest egg or accumulating wealth. Here are 5 reasons why your wealth adviser, fund manager or financial planner keeps advocating long-term investing:
1.More aligned to investing for life goals
Most investors are ultimately investing for their life goals ie: saving for retirement, children’s education etc. By definition, long term means a period of at least five years – hence, your life goals that fall within this time-frame classify as long term goals. And to achieve these goals, they should be funded through savings and investment returns.
If we were to rely purely on saving our extra disposable income off our monthly salary, it will undoubtedly take us longer to amass the funds needed. Adding the effects of inflation to the mix means our purchasing power dwindles even further.
Our investment portfolio must be reflective of our investment objective. The asset class chosen and investment horizon has to correspond to the time horizon of our life goal. As a rule of thumb, the longer it is until we reach the dateline of the goal, the more aggressive the stance of investment we can afford to take.
Research also says that it pays to stay invested in the equity market rather than switch out at the first sign of trouble:
2. Harnessing the power of compounding interest
The most obvious allure of long term investing is the effects of compounding interest. The general rule of thumb is that the earlier you begin investing and the longer your time horizon, the more portfolio growth you will achieve.
There is no magic formula in building up your wealth, but a sure-fire way is through compounding interest. Even small but consistent amounts of investment can add up over a long period of time. It also helps in the compounding effects.
Investors should also bear in mind that market noise and trends may be temporary. Hence, it is not advisable to overreact to market movements. Staying for the long haul helps in compounding interest.
3. Reduced fees and expenses
Fewer buy and sell calls also means that long-term investing saves on investing expenses.
Brokerage fees and other transaction costs are incurred by share traders while Unit Trust investors have to pay upfront sales charge. Actively trading or frequently moving in and out of funds mean that traders and speculators keep racking up on these fees and expenses. And these costs quickly add up, reducing your total net investment returns.
4. Judging Fund performance
Unit Trust Funds are usually one of the building blocks or main components of an investor’s wealth. Hence judging the performance of Fund Managers is crucial.
In a weak broader environment, even fundamentally strong stocks will be sold down alongside the bad or speculative ones.
However, the key difference is that when the dust finally settles down, the good names will be one of the first to rebound. So, during these periods, what the managers may need is time, for their implemented strategy to bear fruit.
Nevertheless, it’s important that you are updated with their investment strategy.
However, as unfair as it may be to nail a quick judgement on a Fund which achieved negative returns in a bad year, it is also inappropriate to only assess its performance when all is good and rosy. A rising tide lifts all boats; any stock or fund should theoretically enjoy higher prices in a bull market.
In short, it will be more appropriate to judge the performance of an Equity Fund Manager over a period of at least 1 market cycle. Preferably, we would want to know how he performs, during good times and in bad times.
Areca Capital is a niche Malaysian fund management company. We are a firm believer in the advisory-based approach towards investing.
We help our clients, who range from individuals to corporates, family and private trusts, foundations and other institution to achieve consistent risk-adjusted returns over the long term. For any enquiries, you may contact us at 0379563111 or by email: invest@ arecacapital.com
Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. Investors are advised to consult professional investment advisers before making any investment decision.