Investors should have a long term horizon, says CEO and Founder Mike Taylor. He explains why.
When it comes to being successful as an investor, there are a few things that can help. Having a diversified portfolio that suits your risk level and doing your research first are a couple. However, I believe taking a long-term approach to your investing is one of the most important. When people invest, they often want instant results. With property, many of us are happy to buy and hold properties for years, even decades, and ride out market highs and lows. Investing in other asset classes should be no different.
Taking a long-term approach to your investing can be easier said than done. So, how do you do it?
Choose your strategy
An investment strategy is a plan to help you reach your goals. Everyone’s strategy will be different and based on your investment time frame, risk tolerance, goals and financial situation. For most people, investing is for the long term. Sure, there are some people who are traders, which means they buy and sell assets like shares or properties often. But most people will be investing for at least a few years. A financial adviser can help you work out the right investment strategy for you. Once you’ve got a strategy, stick to it. Review it from time to time or when your circumstances change.
Diversification and risk
Investing for the long term helps reduce your risk. That’s because over short periods, markets can go up and down. But over the long term, your investment returns are likely to be positive. After all, that’s why people invest - to make returns. Investing for the long term allows your investments time to recover if the market falls in the short term. Diversifying your portfolio for long-term investment can also help reduce your risk. Setting up your portfolio to cover a range of asset classes, regions and sectors might form part of your strategy. The hope is that by diversifying, if the market dips, not every investment will fall in value. Some will perform better at different times and over the long term these returns should average out. Dollar cost averaging, effectively drip feeding money regularly into an investment over a long period, also can help reduce your risk.
Manage your emotions
When you can manage your emotions, long-term investing becomes much easier and much more effective. Panicking or worrying about your investments is not healthy, and can make investing stressful and not very fun. For many people, managing emotions can be one of the hardest things about investing. This escalated during the large market dip in early 2020 due to Covid-19. Many KiwiSaver investors saw their balances drop significantly, and panicked and changed to more conservative funds, with some locking in large losses. Markets usually always recover over the long term, so try to stick to your strategy, and avoid checking your investments too regularly.
Do your research
How a fund has performed in the past doesn’t guarantee its future performance. But long term performance can provide some helpful insights when selecting where to invest your money. There are two ways to research and assess a fund before investing. First, look at the investment strategy. This is in the fund manager’s disclosure documents. The second is by looking at the fund’s long-term track record and checking that the person who achieved that track-record is still around. If you’re unsure, ask the fund manager.
It’s really no different to sport. Dan Carter had a great track record of kicking goals, but that didn’t mean that he would achieve 100% every game. A track record is a good guide, especially if it’s consistent over a long period of time. More importantly, a track record can highlight funds or providers that consistently underperform and are ranked low over a long period. Independent investment research company Morningstar has credible comparison tools that help you compare funds. Sorted’s Smart Investor tool and the Financial Markets Authority also have helpful comparison tools.
Investments shouldn’t be something you lose sleep over. Investing for the long-term can help ease the short-term stress, reduce your risk, and help you reach your goals.
Tips to stay focused on the long-term
- Don’t check your investments too regularly
- Avoid getting caught up in any panic on social media or on news sites
- Have long-term goals associated with your long-term investment horizon
- Find ways that work for you to help you stay rational about market falls
- Reach out to a financial adviser for help and support if you need it
- Remind yourself of your strategy
- Life isn’t all about investments and money, find other things that you can put your energy into as well
Information is current as at October 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.