The 3 Key Principles of Long Term Investing
The 3 Key Principles of Long Term Investing
Should I stay or should I go now? It’s the million-dollar question when it comes to investments – when is the right time to take the money and run?
We get it. You’ve decided to invest a lump sum of your savings. You’ve committed to a long term investment, understanding that it carries more risk than some short term options, but has the potential to have a greater return over time. Then, boom – something like a global pandemic happens. And suddenly, all of those obscure ‘what if’ scenarios that seemed fine in theory when you were filling out risk assessment forms, become far more tangible, and have a real impact on your investment fund.
So it’s only natural that instinct kicks in, telling you to grab your money and head to the nearest emergency exit. But while that might seem like the most sensible move, it’s probably not the wisest one.
Every day for the past year, we’ve been watching news reports on repeat about record levels of unemployment, market volatility, economic turmoil is in full swing, and the full impact of Covid-19 is still to be determined.
If you’re considering taking your money out of an investment fund because of the uncertainty that lies ahead, it’s important to first consider some of the most important principles of long term investing:
Time in the market versus timing the market
Let’s face it – no one can actually predict the future. Trying to time the market for a swift exit before the going gets tough is rarely a good idea because there is no real way of knowing how much stock indexes or interest rates will drop (and inevitably rise again). This means that when you bow out of your long term investment, you are locking in your losses, giving your money no chance to recuperate.
Whereas time in the market has nothing to do with predictions. It’s about perseverance – holding firm rather than panic-selling or withdrawing your funds, and giving them time to grow instead.
Take this report by J.P Morgan, for example. It shows that if you missed the best 10 days in the market between 1999-2018, your return would be cut in half. Ten days over twenty years – it’s a minuscule amount of time, with an enormous overall impact – imagine pulling your money out of this investment until things started to appear brighter, and missing these days in the process (6 of which occurred within two weeks of the 10 worst days!)
The market by its very nature will always go up and down. Leaving your investment as is during tricky times doesn’t equate to sitting back and doing nothing – it’s really a strategy in itself, allowing your investment to reach the goals that you originally set out for it.
History speaks volumes
There’s nothing new about market volatility. Looking at the past, we’ve seen pandemics. We’ve seen bubbles burst, and lived through a recession (many of us more than once). Markets have recovered, time and time again.
Over the course of nearly 75 years, bull markets (when the market is rising at a rate that is above average) have lasted for an average of 49 months, compared to bear markets (where share prices are falling), which have lasted for an average of 13 months.
And while saying that history repeats itself would be like claiming to predict the future (something that none has the ability to do), it should provide some reassurance that over time, long term investments still provide the most significant growth when given adequate time. As Joe Davis, chief economist at Vanguard stated: “Investors, we’ve been here before. We’ve seen 13 corrections and eight bear markets in global equities in the last 40 years. That’s about one every other year. And over that 40 years, global equities increased by a magnitude of 17 times. So hang in there. This too shall pass.”
Spreading risk is key – but don’t make changes on a whim
Having a diverse investment portfolio mitigates risk. It’s generally best not to put all of your eggs in one basket, especially with long term investments, and most plans will mirror this. However, if you are thinking about making considerable changes to your existing portfolio purely because of market volatility, it’s important to remember your original strategy and goals. Any long term investment requires a comprehensive plan, one that reflects your own attitude towards risk. Ask yourself whether making changes to your plan is down to you being proactive or reactive. For example, if you’re just a few years away from retirement and the majority of your investment portfolio is in stocks, it could be an idea to make some adjustments to remain cautious. Similarly, your investment bond might have an ‘autoinvest’ option where you can drip feed your funds into the market gradually. This could be a good option if you’re just starting out. Either way, any tweaks to your portfolio should come from well-informed decisions that ultimately keep you on your original path rather than take you in a different direction completely.
A long term investment is a long term commitment, one that requires discipline – especially in times like these. Having a trusted advisor to help guide you through any uncertain times, or life changes that you might be experiencing is so important. We’re all influenced by the news, social media, and personal opinions. Speculation can often lead to panic, or making decisions that don’t necessarily align with your original end goal or strategy. Always seek advice from a qualified financial advisor about any concerns you might have – because feeling confident about your investment really is half the battle.
Want to talk about your own investment options? Book a free 15-minute consultation with a member of the team now.
The information above is purely for educational purposes and does not constitute advice on any particular investment strategy. Please seek 1:1 advice on your individual investment portfolio.