Think Ahead, Invest Long-Term
With the first half of 2020 being so volatile, it is more important than ever to focus on long-term investing. Prices move constantly and market timing is next to impossible. Long-term investing occurs when purchasing an investment with the intention to hold for a long period of time. Many famous investors, such as Warren Buffett, are avid supporters of buy-and-hold investing.
Long-term investing is the best investment strategy for most investors, whether you manage your own portfolio or work with a trusted financial advisor. Investing for the long-term is always a good fit, whether you are investing to build wealth for retirement or investing to protect your wealth.
Whether it is investment funds, sovereign debt, corporate bonds or shares, strong evidence suggests that investing long-term, works better for most people.
Holding a portfolio for a longer duration allows the investor to ride the peaks and troughs of the market and capture that gain in the portfolio. Two options for the long-term investors are diversified strategies. Actively managed and passive funds argue that one major advantage is the reduction of default risk from the investment portfolio.
The risk with long-term investments is that financial assets can fall in value at any given time. But because your objective is to remain invested for the long-term, investors should remain invested, and not jump ship with every pick up in market volatility. This as long as the investor can weather market volatility. This mindset always benefits the investor. That is why one must think long-term, to give time to overcome the short-term dips and favour longer term returns.
Over a short period of time, financial markets might move lower. Shares and other asset prices fluctuate continuously during trading hours. While many people think of investing as trying to make a short-term score in the stock market, evidence shows that it is long-term investing where regular investors can really build wealth. By thinking and investing for the long-term, investors can meet their financial goals and increase their financial security.
Investors today may have many ways where to invest their money and can choose the level of risk that they are willing to take to achieve their investment objectives. While long-term investing can be the path to a secure future, one must understand both the importance of risk and the time horizon to reach the financial objectives.
Diversification is key in a long-term investment strategy. Different asset classes outperform others and help to balance the portfolio in times of crises. Shares may be the best performing asset class today, but bonds and other asset classes maybe more attractive after that. Since no one can predict what the future holds, and how investments will perform, the best strategy is to have a certain level of diversification, at least across asset classes with low correlation.
While equities as a whole have a strong record with the S&P 500 index having a yearly average return of 10% in the last ten years, individual stocks are well-known for their volatility. It’s not unusual for equities to fluctuate heavily in the short-term.
It is key to determine the risk tolerance and how will one react when investments go down in value. Cautious investments, such as sovereign bonds tend to generate low income yields, but provide better capital preservation. On the other hand, medium risk assets such as corporate bonds tend to provide higher yields.
History shows that over the long-term equity markets tend to outperform safer assets. However, higher returns come with a higher level of volatility. The long-term investor who is after capital growth should keep in mind that market sell-offs happen from time to time. Ideally, an investor’s portfolio is reviewed on an ongoing basis and especially when certain milestones and life stages are reached.
Time is a huge ally for investors. Those investors who are committed to invest for the long-term, do not have to spend much time following the performance of their investments and fret about short-term moves. An investor may set up a long-term plan and then stay mostly passive.
A financial advisor can help you build a diversified portfolio designed to reach your long-term objectives. Investing for the long-term is one of the best ways to build wealth over time. But the first step is to put your mindset to think long-term and to avoid following obsessively the market’s daily ups and downs.
Adrian Mifsud, Cefa is an 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]