Countless investment articles have continually espoused the benefits of having a long-term view. Forget about the short-term setbacks and keep your eyes on the prize. It is just a bump in the road. Stay invested and you will reap the rewards in the end.
But in reality, adopting a long-term view might be more difficult to practice. It can be a long journey riddled with sudden surges of volatility capable of wiping out massive gains in a portfolio.
Telling someone to be patient and ride through the volatility is the common refrain used in the industry to tell investors to stay invested and not part with their funds. But how convincing is it sometimes?
Here are a few tips on how you can practice long-term effectively in your investments:
1. Accept That It Is Going To Be Bumpy
Having a long investment horizon does not mean you will be spared from the volatility that is bound to happen in any market. An investor with a 20-year investment horizon who started investing in the year 2000 would have to endure the dotcom bubble, September 11 terrorist attacks, the 2008-GFC, taper tantrum in 2013, and now the Covid-19 pandemic.
In fact, the longer your investment horizon, the more economic recessions, bear markets, geopolitical flares and market memes you have to endure. Saying that you have a long-term view does not automatically give you a free pass and allow you to bypass these short-term swings. Your portfolio will react in tandem and you might have to put up with losses for periods of time. This sounds painfully obvious, but few investors appreciate this fact.
Many still react immediately and make drastic shifts in their allocation because the sight of red just makes them nauseous. That is when you start making those impulsive decisions and kicking yourself later.
Learning to live with volatility requires a mental adjustment and some getting used to. But accepting it is the first step.
2. Diversification Is No Fun, But It Works
The future is inherently unpredictable and no one has perfect foresight of everything including how an industry or a company will evolve in the future. So how do fund managers do it then and invest with conviction?
The answer probably lies somewhere in between. There are no absolute yes’ or no’s in the investment realm where the tide can turn at any time. Decisions are made by fund managers by determining what is probable and what is not based on information available.
That is also the reason why the holdings of a fund are diversified across different companies or sectors to avoid any overreliance on a single stock to drive returns.
In an age of instant gratification, where expectations for returns have only gotten higher and quicker, diversification almost seems passé today. Making concentrated bets in eye-watering meme stocks or cryptocurrencies with promises of double-digit returns is now considered à la mode.
But to succeed in investing is not about making no mistakes at all. Not even Warren Buffet can lay claim to that. Rather, it is about making sure you get more rights than wrongs in your investment journey.
The fact that we do make mistakes in investing is why it is critical for our portfolio to be diversified. That way, losses can be offset by gains in your portfolio to ensure that you still have skin in the game.
Setting aside some ‘play money’ to chase the next stock or crypto darling is unlikely to do much harm. But the real danger is when investors gamble their entire savings away and lose all their capital with no chance of ever returning.
3. Holding Power Is Crucial
The ability to think long-term can only happen when we feel secure about our present state. An investor with low savings and piling debts cannot be expected to stay ‘optimistic’ about the future and ignore the losses in his portfolio when his survival is on the line. Who bothers about the future, when they are worried about the now?
There were many lessons that Covid-19 taught us about managing money, but the most valuable one is undoubtedly the importance of keeping an emergency fund.
The future is becoming inherently more unpredictable. The only way to tide things over is to keep an ample margin of safety through cash reserves and liquid instruments such as money market funds.
To be fair, it is hard to know how each of us will react when a market meltdown happens. It is usually preceded by really scary events like a terrorist attack or this current pandemic. But if you are experiencing real anxiety, perhaps it is an indication that you might be taking too much risk or you actually do not have the financial endurance that you thought you had before.
This brings us to the final tip…
4. Revisit, Review And Rebalance
Change is constant throughout history and market cycles. But many of us underestimate the capacity for change in ourselves too. Major life events such as a new addition to the family, marriage or a career switch can affect our capacity for risk and investment objectives.
For example, an investor who is now nearing retirement might have to tweak the portfolio’s allocation towards more conservative asset classes like fixed income or balanced funds. On the other hand, an investor who has just become a parent may want to be positioned more heavily in equities for long-term capital growth opportunities.
While investors should commit and stick to their long-term plan, it is important that they also periodically review their portfolio to see whether it is still geared effectively to accommodate any new changes in their life. An investment plan should not necessarily be seen as being carved in stone; it is meant to be organic and fluid just as life is.
Lastly, throughout the year, an investor should also consider whether the asset allocation (for example, in equities and fixed income) has drifted away from the initial parameters because of market movements. In hot markets, the equity portion in a portfolio might climb higher than other asset classes.
Rebalancing is then necessary to ensure that the portfolio is reset back to its target allocation to ensure that it is compatible with the investor’s risk appetite. Otherwise, the investor might be taking more risk than originally intended which might be detrimental to his long-term goals.
Hold On And Sit Tight
Long-term investing is not so difficult when you focus on yourself and ignore the goings-on of markets. Some patience is needed, but what is also essential is the ability to endure and be willing to put in the time to compound returns.
As legendary American stock trader Jesse Livermore said, “It never was my thinking that made the big money for me, it always was sitting.”
About the Author
Lee Sheung Un is a Communications Officer at Affin Hwang Asset Management. A millennial, he is still finding that balance between wealth, freedom and purpose. Views expressed are his own.