22 Sep Why Long Term Investing Provides Higher Success Rates
“Invest long term” is the what we usually hear from the successful investors. However, what does it mean to ‘invest long term’? Why is long-term investing better compared to short-term investing? Today, we explore these questions.
What is ‘Long Term’?
Everyone has a slightly varying definition for the term ‘long term’. For investors, long term could range anywhere from 3 years to a lifetime.
With our Conservative Net Asset Value (CNAV) strategy, our definition of long term is 3 years. If our stock does not perform within 3 years, we move on.
It is important for you to consider what your investment time horizons is, in order for you to refine your investment strategy.
Determining Your Personal Investment Horizon
In a nutshell, you can determine your investment horizon by asking yourself when you would need to withdraw your investment capital. For example, investors who are saving for a property purchase would have lesser years compared to similar investors who are saving for their retirement. Of course, both investor should ideally also have an emergency savings fund set aside during their investment period.
On a side note, even investors with longer time horizons would struggle to stay invested over the long term due to a different threshold that exists: emotions. Stressful market conditions can affect our emotions hence average investors rarely stay invested throughout their expected investment horizon.
However, let’s not digress.
So, why is it so important to invest over the long term?
Before we dive in, it’s important to understand the difference between saving and investing. When you save your money in say, a savings account, you would expect to your original sum of money to stay there, along with a small interest based on the agreed rate at the time of opening.
However, when you invest, the value of your original capital may fluctuate. We would expect to make a profit, but it is also possible for our investments to end up as a loss. There is much less certainty with investments.
Your investment capital is exposed to more risk for the opportunity to generate higher returns as compared to the savings account.
The certainty that a savings account provides comes with the price of a lower return. After taking inflation into account, the value of your savings may be lower over the long run.
With that said, savings account could in reality be more ‘risky’ than investments.
With a longer time horizon to play with, you will be able to react to market movements, tweak your investments accordingly and have the capability to watch your investments returns thereafter. If your time horizon is short, you may be forced to close positions regardless of its performance.
Types of investments
Different investment types come with different risk levels, you should use investments that suit your risk profile and comfort level.
For instance, government bonds from developed countries are seen as less risky as compared to stocks but more risky as compared to savings accounts
By investing across investments with different risk level, you would be able to diversify and hence lower the overall risk of your portfolio. The theory is that the fluctuation of one investment class would be offset or balanced by another investment class.
Now comes the main problem.
Regardless of how well-planned your investments are, there are bound to be peaks and dips due to changes in the economic cycles. Decisions made by the investor during these fluctuation have a great impact on their returns. Sometimes, it is better to seat through a market dip rather than sell and realise a loss.
However, frequently when the market dips, investors will have a tendency to feel a need to do something, such as sell all or some of their investments, despite the fact that the best thing to do may be doing nothing.
And this is where most mistake occurs. It is better to stick to your investment strategy and make decisions based on your strategy rather than the market condition.
It can be difficult to stay invested and stick to your investing strategy due to the anxiety that may be due to short term fluctuation in the market.
Some individuals possess a higher degree of tolerance than others.
First up, understand your personal risk tolerance and maximise investment classes that are suitable for your risk appetite.
Second, you should know your time horizon and what you are investing for.