Keep investing and stay invested through both good and bad times.
While investment advisors and analysts guide us about where and what price to invest, there isn’t much on how long do we invest. The other advice we receive is about having a long-term vision or goal and then building your investment portfolio to get there. There are, however, situations when we are in conflict as to what is the ideal time period or why we should think long-term at all.
Any inflation-adjusted growth in wealth requires investment in assets with the potential to appreciate in value. The prices of growth assets such as equities, commodities like gold or silver, or property, are cyclic and have their ups and downs. Staying invested enables the investor to ride on such cycles and generate wealth. Long-term investing enables one to even out the interim losses. The easiest way to manage the risks associated with growth assets is to hold them for long enough.
| INVESTING FOR THE LONG RUN |
|
| RETURNS | ||
| Particulars | 5 yrs (%) | 10 yrs (%) |
| S & P CNX NIFTY | 15 | 41 |
| GOLD BEES | 39* | NA |
| Real Estate - Mumbai@ | 40 | 25 |
| Fixed Deposits^ | 9.0 | 9.5 |
| Bonds | 9.5 | 10 to 11 |
| ||
How long is long enough? A simple inference from the above argument is that for any investment in growth assets, to be worthwhile, it should cover at least one boom period. And if there is more than one boom period, it is even better.
This brings us to the next logical question: How does one invest for the long term? Such an investment should be made in diversified assets with varying tenors, not through individual bets. Wealth accumulation comes from buying adequate quantities of a growth asset. For instance, an investor may have picked a great stock in an Initial Public Offer and held it long enough to feel good about the growth in its value, but it may be too minuscule a part of his wealth to make a difference in the overall portfolio.
This is why investors love long-term investment in property. The problem is that it is difficult to sell or liquidate on demand to realise the gains. Whereas, if one buys stocks and holds these for the long term, the portfolio has to be monitored carefully. If the index has moved from 100 in 1980 to 18,000 today, this should be reflected in the return delivered by your portfolio of stocks, shuffled several times to throw out the bad ones and include the good ones. This is why equity mutual funds make immense sense, where we buy a portfolio and pay the fund manager to watch it for us.
So, why don’t all investors go for long-term investment? Equity investment, unlike property, is liquid and can be tracked on a daily basis. A number of investors believe the market can be timed, a confidence abetted by the perception that successful investors do just that. Compared with the ‘smart’ strategy of picking tomorrow’s winners today and selling off at the ‘right’ price, long-term investing seems staid and conservative.
The table above gives the simple returns from various avenues locked in for the period stated below:
As can be seen from the above table, the returns from equity, gold and real estate have been phenomenal and have beaten inflation. The returns from fixed income instruments such as fixed deposits, bonds, etc, are much more subdued. However, it does not mean they should not be part of your portfolio. The fixed income instruments usually provide liquidity and stable returns. They are also secure in nature.
For your long-term investments, you should have a mix of investments across various asset classes.
A diversified, well-balanced portfolio of cash, stocks, bonds and real estate is less risky than if you invested in just one or two types of assets. Those who invest in a diversified portfolio are better equipped to ride out market volatility, without dramatically affecting their ability to reach their goals.
AVENUES & TENURE
Equity and equity oriented funds: The most appropriate tenure for equity and equity-oriented mutual funds is three to five years. Usually investment in equity provides superlative returns if held for this duration. Since equity investment is risky, it may be appropriate to encash on gains once every three to five years and redeploy in undervalued stocks.
Gold: Gold can be held for a longer duration. This is because gold is a good hedge against inflation. Also, the volatility in value is less as compared to asset classes such as equity or commodities.
Real Estate: Real estate has seen a phenomenal increase in value over th past five to seven years. However, they are big-ticket investments and less liquid as compared to other asset classes. It also has high transaction cost. Real estate can be held for the largest period of time, as they give returns not only in form of capital appreciation but also provide rental income.
Bank deposits: The ideal tenure for bank fixed deposits should be varying from a year to five years. By having a varying tenure, it will provide liquidity and also cushion out volatility on account of interest rate changes.
Bonds: The ideal tenure on bonds should be from 10 to 15 years. By having a longer tenure, the investor may avail better rates.
Stay invested: Don’t let your patience run out or your emotions get the better of you and derail your overall investment plan. Keep investing and stay invested for your long-term goals in both good times and bad.
From time to time and certainly at least annually or once in two years, it is important to review and rebalance your portfolio. Compare its performance to relevant benchmarks and determine if you are making progress toward your financial goals and that your investment strategy is still on track. The simple mantra of building real wealth over the long term is true and effective, too.
The author is a freelance writer
