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 can be 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 four reasons why your wealth adviser, fund manager or financial planner keeps advocating long-term investing:
- 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 are 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. Refer to example below:
| Current University Fees: | RM 300,000.00 |
| Projected Lump Sum needed when University starts in eight (8) years at assumed 6% inflation per year: | RM 478,154.42 |
| How much to save monthly to come up with RM478,154.42 in eight (8) years? | |
| If placed in Fixed Deposit yielding 3% p.a: | If invested in an 8% p.a Investment Portfolio: |
| RM 4,413.16 | RM 3,571.82 |
Theoretically, the investor would only need to save RM 3,571.82 monthly if he invests the money in a higher yielding asset/portfolio. This is RM841.34 less than placing in fixed deposit (FD).
In total, he would need to save RM80,768.64 lesser (RM841.34 x 12 monthly x 8 years) than if placed in FD over the eight years’ period. That is how the notion of ‘letting your money work for you’ came about.
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.
- 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.
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.
- Less emotional stress
It is not uncommon for investors to make decisions due to emotional, behavioural biases or perception issues. We are humans after all. Nevertheless, the effect becomes magnified when we feel there is a lot more at stake.
For instance, a father investing the funds for his children’s tertiary education: The pressure to not make any mistakes with the investment funds could lead to a behaviour that is too short-term oriented or a never-ending, but futile search for the best entry point.
By altering the mindset that the funds are of a long-term nature (child will only enrol in University in eight years’ time), there is less of an emotional burden on the investor.
Asset price movements in a matter of days will matter little if the funds are only needed eight years from now. And even if there was a slight market correction, the fund has plenty of time to bounce back before the dateline.
If anything, market corrections can even be an opportunity for the investor to add more to his holdings so he benefits when the market rebounds. What is more important is that he starts investing now so that compounding interest works in his favour.
Conclusion
First and foremost, it is important to start with the end/objective in mind. Project the necessary amount that you may eventually need, added inflation. Then construct a suitable investment portfolio which should enable you to garner the sufficient funds and returns needed to achieve your goal.
Taken in the context of unit trust funds for simplicity, this would mean bond funds for shorter term and equity funds for longer term goals.
The percentage and composition of bond fund and equity funds would be personalised according to your investment objective, risk appetite, investment horizon, required rate of return etc. This is your strategic asset allocation.
From thereon, maintain the strategic asset allocation of your portfolio and avoid making any drastic moves unless they are warranted, re-balance periodically and make small tactical adjustments when necessary.
Always keep your investments aligned to your long-term goals. We are investing for the long haul. – April 9, 2023
Danny Wong Teck Meng, CFP is the CEO of Areca Capital Sdn Bhd and a certified member of the Financial Planning Association of Malaysia (FPAM).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
