The Long Term Gain
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.