Patience and Discipline Pay Dividends – in the Long-Term – By Gabriel Mansueto
When it comes to investing, many investors are in a hurry to multiply their investments. At first, people may be too ambitious and eager to enter the investment world. Very often this leads to excessive risk-taking, and as time passes by they may regret their previous decision. At this stage, some investors jump ship and stay away from certain financial assets due to a negative short-term investment experience. Many of the world’s best investors understand that investing for a quick buck tends to generate very poor long-term returns.
Following the years after the 2008 financial crisis, local investors made impressive returns over a very short period by investing in Malta Government Stocks (MGS). Some investors, who back then were relatively new to investing, got the wrong impression that investing in financial markets will generate undisputable and short-term risk-free gains. Unfortunately, the opposite holds true. While investors should take advantage of any short-term opportunities which may arise, such as the MGS case some years ago, they should also keep in mind that such opportunities are few and far between.
Lately, one investor told me that financial market returns are usually slow moving. His statement might be correct over the short-term. However, I disagree completely if one were to consider investing for the long-term – a strategy which involves buying and holding securities which you believe will compound wealth. At first glance it may not seem to be the most exciting strategy and, to add insult to injury, it requires patience and discipline.
It is a known fact that long-term investing is a major contributor of wealth creation. However, given investors’ preference for potential short-term gains, very few are willing to stick to an investment strategy which does not bear fruits instantly.
Long-term investing is successful because an investor engages in such a strategy only after a thorough analysis of a financial product, given the strategy’s long-term nature. Hence, despite market fluctuations, an investor will most probably stick to his strategy, without getting carried away by market sentiment. In addition, the investor does not need to constantly watch where markets are heading, since short-term noise will not distract him from his long-term objectives.
The more time you allow your financial assets to compound, the better – while long-term investing requires less of your time. With the help of an investment advisor, an investor can prepare the ground-work and choose the assets to invest in. Following that, it is advisable that the investor does not check his portfolio’s performance daily. Well-diversified investment funds or exchange-traded funds can significantly reduce both default and concentration risks, hence protecting long-term investors from the negative performance of one or a few securities. In other words, these financial products reduce the probability that a significant portion of an investor’s portfolio goes under, with no probability of recovery.
Long-term investing is not easy and it is definitely difficult to hold on to an investment strategy when markets sell-off and risk-aversion soars. However, real conviction does the trick for an investor who holds on to his long-term strategy when selling pressure outweighs demand.
Given the strategy’s long-term horizon, it is usually advisable that investors put their money in equity-linked investments since the latter have significantly outperformed bonds and cash over the long-term. Yet, by doing so, investors are accepting a higher level of price fluctuations. Some investors do not tolerate significant market movements, so they may opt for a safer alternative such as accumulator bond funds or a with-profits fund. Over the long-term both will accumulate wealth for investors but at a slower pace compared to an equity-linked fund.
One possible long-term investment strategy could be investing in a fund with exposure to dividend-paying equities. The reason being that a company with a long history of dividend payments can only pay further dividends if the business is growing. So while your investment is generating regular dividends which are being compounded to the original investment, your portfolio is exposed to long-standing profitable businesses.
Unfortunately, long-term investing is very often overlooked with investors failing to understand that by being patient and disciplined an investor can turn a few thousands into hundreds of thousands. The longer an investor remains invested the better the chances of achieving significant wealth creation. For example, if an investor invested $100,000 in the Standard &Poor’s 500 Index in 1987, by the end of 2017 the value of the investment would have grown to just over $1m after adjusting for inflation and assuming dividends were reinvested. That is an annualized return of nearly 8 per cent. The earlier the investor starts and the more he can contribute towards his investment objective the more wealth will compound. Despite this good past performance investors should remember that this is no guide to future performance.
Knowing what you are invested in is central to any long-term investment strategy. Through a good understanding of what you are investing in, and planning to hold your investments for an indefinite period, forces investors to be highly selective as to what to invest in. The desired objective will not be reached if an investor is closing his positions to realise small profits, making it much harder to become wealthy. Moreover, over-reaction to financial news and market sentiment does more harm than good to your future wealth. On the flip side, investors who embrace long-term investing through patience and discipline will be successful investors.
This article was prepared by Gabriel Mansueto, Branch Manager and Senior Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]
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