Discipline and Successful Long-Term Investing

Making investment choices should not be a daunting task if investors choose to invest in assets based on the objectives they wish to achieve. Professional investors have embraced this strategy quite a while ago. However, in some instances retail and high net worth clients fail to make choices based on investment objectives. Sometimes, more attention is given to which market or emerging industry is expected to generate stellar returns in the next few months.

Despite all the health concerns and economic strains which 2020 brought with it, financial markets have performed generally well – assisted with record monetary and fiscal stimuli. Some sectors proved that they are immune to the pandemic, as their business boomed to levels never seen before. As a result, financial markets rewarded such companies with frothier valuations. On the other hand, the hardest hit sectors are yet to recover from the lows reached last year.

While sector rotation, from the winning sectors to the underperforming sectors, has started since last November, investors should remain vigilant and should not expect the performance witnessed last year in risky assets to occur again this year. While there is a long way for the global economy to recover, financial markets will price in the economic recovery in advance. And while every piece of positive economic data will support markets going forward, one should expect that market volatility or fluctuations in the value of investments could be higher than what we witnessed last year from the last few days of March onwards.

So, while a short-term investment plan may have worked well last year, it may not be the case this year. The sell-off witnessed during February and March 2020 caught markets off guard, during a year when probably most of us thought that the biggest risk for financial markets was the US Presidential election. The kind of sell-off witnessed last year does not happen too often.

Therefore, a long-term investment plan should be a top priority for investors who have an investment plan with a set objective. When investors are seriously considering a long-term investment plan it is crucial for the investors to understand their risk profile. Following that, a good understanding of the investment products and their expected return and volatility is paramount for the investor to be able to stick to the investment plan and be less distracted by negative news. Hence, the initial stages of the long-term investment plan, that is defining the investment objectives, understanding the risk tolerance and know what to expect in terms of returns and volatility, are crucial.

Following the news for market updates may add to the distraction, as not all news will be having an impact on the value of the investment portfolio. This was clearly the case last year, as many were surprised that by year end their diversified portfolios performed well despite the torrent of negative news.

Another advantage of adopting a long-term strategy for the core portion of the investment portfolio is that investors will need to check on how the portfolio is performing less often. Frequently, looking at the value of the portfolio gives investors a greater sense of the portfolio’s risk and little understanding of returns.

This does not take away any of the benefits of ongoing portfolio reviews. The latter are not meant to make unnecessary portfolio changes, but to make sure that the portfolio’s asset mix and expected returns are in line with the investors’ risk profile and investment objectives.

Another benefit of long-term investing is that it helps investors staying away from market timing. Many experienced investors agree that timing the market is next to impossible, so why do investors let their emotions get in the way? Research shows that investors who exit the market or do not top-up their investments when volatility picks up, lose out on the usually strong recovery which ensues. These are the periods when sizeable returns are made.

Trying to time the market may also lead to higher portfolio costs. Charges can significantly eat into the portfolio returns if investors are changing the assets in the portfolio regularly. A planned long-term investment strategy with several core holdings should result in less portfolio changes and therefore less fees related to transacting.

Short-term volatility may be elevated across time. This time round it’s no different. News related to the spread of the virus will be on investors’ minds, while positive news related to the effectiveness of vaccines and any news related to a reduction in infection rates should help elevate sentiment. However, with improving economic figures, inflation and employment related data is also expected to improve which may add to volatility in the medium term, as higher inflation may induce central banks to scale back stimulus programs. Having said that, as professional investors do, long-term investors should stick to their long-term plan to achieve their investment goals.

Gabriel Mansueto is the Head of Investment Advisors 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]