Legendary investor Warren Buffett famously said ‘our favourite holding period is forever’
You may not want to plan quite that far ahead but thinking long-term when investing is vital. With interest rates still close to zero, cash in the bank is currently earning next to nothing. At the same time, the need for income is growing. Retirement is growing longer thanks to rising life expectancy and the new Pension freedoms have given us all much more control over how to invest and access our savings. If you are thinking that now is the time to dip your toe into investment, then here are some things you need to consider:
Why taking a long-term view matters: A well-diversified portfolio can be a nice earner but you need to go in from the outset with a strong sense of what your aims are and be prepared to invest for the longer term. This will be different for every investor but be prepared for a time horizon that should be 10 years and longer. The market can fluctuate hugely over a number of years, which can be unnerving for a DIY investor. Markets react to sentiment, so stocks can fall if a company reports worse than expected results, or sometimes the whole market can fall at once on negative economic news, meaning you could actually lose more than you invested. Occasionally, there genuinely will be a reason to sell, but often these are knee-jerk reactions because the share price can recover over time – and you don’t want to have sold at the bottom. The key is to look at the long-term fundamentals of a particular investment. Unless the investment case fundamentally changes, it is better to maintain your position, or perhaps even top it up, to take advantage of a short-term weakness in the share price. Trading stocks and shares also costs money, so moving in and out of positions quickly will seriously eat into your returns over time.
Consider how long you should stick with a fund: The same applies for investing in a fund. Many funds go out of favour for a while but then bounce back. As long as you trust the manager and what they are trying to achieve, it’s a good idea to make your initial choices very carefully, and then stick with those investments for the long term. However, there is a mind-boggling universe of funds to choose from and it can be hard to pick the ones that are right for you. The track record is a good place to start. Although past performance is no guarantee of any potential future returns. Again, the focus should be on the long term – a fund may have had a few tough quarters, but how does its three-, five- and 10-year performance stack up? Then watch out for ‘style drift’. Has the fund stayed true to its stated purpose or has it blown off course? Of course, fees are an important consideration. These can really add up over time and erode the returns made for you by the manager. Passive tracker funds can be much cheaper. Trackers follow the fortunes of an index, so if a market you are tracking rises your investment will increase. But your investment will also drop if a market falls. Paying a bit more for an active fund, where you have an experienced manager making active investment decisions, can be beneficial as they try to beat the markets whether they are rising or falling, but make sure you are confident that they can really add value.
Don’t rely on just one thing: Finally, don’t put all your eggs in one basket. You need to diversify with investments that do slightly different things so that if one part of the market does badly, the damage to your portfolio is mitigated.
When Investing, take advice from the Master. Let me know if you need help.