The Long Term Gain

The Wokingham Paper - - NEWS -

EV­ERY­ONE likes to see their in­vest­ments grow but you need the right mind­set to en­sure a suc­cess­ful strat­egy. Oc­ca­sion­ally I still come across peo­ple who fo­cus on the short-term as­pects of in­vest­ing, and by that I mean they’ll maybe have an­other in­vest­ment that is struc­tured to do some­thing com­pletely dif­fer­ent.

As a re­sult, they’ll of­ten make a com­par­i­son with a port­fo­lio that has an­other ob­jec­tive.

An ex­am­ple of this might be if you’ve bought a di­rect ISA in the past that’s 100% eq­ui­ties which, when the mar­ket is boom­ing, is per­form­ing ex­tremely well. The in­vestor then looks at their other in­vest­ments and asks why all their other money isn’t do­ing as well.

The sim­ple an­swer is that is it’s not in­vested in the same way be­cause it’s not de­signed to achieve the same re­turn. It is de­signed to pro­duce a re­turn that the client needs in or­der to meet their fi­nan­cial ob­jec­tives for the fu­ture and con­se­quently has less risk as­so­ci­ated with it.

So you might take a dif­fer­ent risk on a pen­sion than you would with a short term ISA hold­ing depend­ing on your cir­cum­stances. A long term growth strat­egy is not de­signed to be in­vested in a way that pro­duces short term gains.

What we are try­ing to do is make sure that the re­turns from your pen­sion, rather than climb­ing vi­o­lently and ebbing vi­o­lently in value, fol­low a much gen­tler Jour­ney, or, more im­por­tantly, as gen­tle as it needs to be to meet your ob­jec­tives. But some­times it’s dif­fi­cult for peo­ple to see be­yond the near term. Here’s an anal­ogy:

Imag­ine that you’re stand­ing on a beach on a windy day. You’ll no­tice the waves are pretty big and vi­o­lent when they’re lash­ing up against your knees or up around your waist but you go up 20ft and it looks al­to­gether calmer and if you look into the dis­tance it looks pretty flat. So it’s re­ally all about perspective.

It’s a mat­ter of un­der­stand­ing that with dif­fer­ent in­vest­ments you some­times have dif­fer­ent needs and it’s a fact that most peo­ple miss out on the re­turn they de­serve by swap­ping and changing their in­vest­ments too much.

They re­act to events and as a re­sult they lose mar­ket bounce back by sell­ing when things have fallen. Or al­ter­na­tively they try to sec­ond guess the mar­ket and do some­thing dif­fer­ently.

Each time they change there is a fric­tion which cre­ates costs on their port­fo­lio. Changing from provider X to provider Y or from fund A to fund B brings in a cost which drags on re­turns.

This fric­tion and drag, even from sim­ply a cost perspective, re­duces the re­turns on your port­fo­lio.

Se­condly, there’s the loss that’s in­curred by peo­ple who are not able to stay in their seat and stay the course. An in­vest­ment strat­egy only works if you keep a level head and don’t over­re­act.

If you’re at all con­cerned about things speak to your ad­viser and he or she will say the same that I’m say­ing.

Short-term fluc­tu­a­tions are in­evitable but, pro­vided you’re pa­tient, long-term gains are pretty much in­evitable as well.

For ex­am­ple, there aren’t many

10, 15 or 20 year pe­ri­ods where cash will have out­per­formed shares. The longer you’re able to stay in­vested and main­tain the sta­tus quo and be pa­tient the more likely you are to get the re­turn you de­serve by com­mit­ting your money to the cap­i­tal mar­kets and in­vest­ing in shares and bonds.

Take time and your port­fo­lio can built up to even higher lev­els

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