Nurture Your Long-Term Investments
10/24/2011 2:35 PM Monday
CEO - Wiseinvest Advisors Pvt Ltd
One of the key things that a serious investor needs to do is to have a plan in place before starting his or her investment process. Although making a detailed investment plan may sound like a complex exercise, the fact is that it is actually a simple process. All one needs to do is to list out one’s goals, i.e. the short-term, medium-term and long-term ones, and then work out a time horizon for each one of them. Having a goal helps in keeping your efforts focussed in that direction.
The next step would be to quantify these goals, i.e. the amount of money one would need to generate over a pre-defined time period to achieve these goals. An important aspect of quantifying the targets is to take inflation into account. If one fails to do so, one would, in all likelihood, face a shortfall after the designated period.
Next, it’s time to decide about right asset allocation and select individual investment options to achieve these goals. Here, time horizon plays a key role. For example, for a short-term goal, the focus has to be on debt and debt-oriented securities, as capital preservation is a priority along with earning modest returns. Similarly, for long-term goals, equity has to be the mainstay of the portfolio, as it has the potential to not only out-perform other asset classes, but also to provide positive real rate of returns, i.e. returns minus inflation.
It is a well-known fact that one needs to build a large corpus to enjoy a comfortable retired life. One of the best ways of achieving this is by starting with investments early in life, as well as having a time commitment. By doing so, one can gain the most due to the power of compounding.
It is heartening to see an increasing number of investors following a goal-based investment strategy. Over the last five years or so, Systematic Investment Plans (SIPs) have emerged as a popular mechanism for investing in equity funds. Although SIPs are an efficient method of turning volatility to one’s advantage, the importance of periodically investing long-term lump sums of money in equity funds cannot be undermined. A combination of these two investment strategies can get you the best results over the long-term. The key, however, remains the commitment to stay invested for a pre-decided time horizon.
Unfortunately, many investors, inspite of showing a great deal of enthusiasm in the beginning, fail to look beyond a three to five year period. In fact, many investors sign up for SIPs for one year at a time. This kind of tentative approach towards this volatile, but potentially the best asset class, makes it difficult for them to accept not-so-encouraging results in a market situation like the current one.
The fact, however, is that a falling or a volatile market provides a great opportunity for investors to benefit from ‘averaging’. That is why it is necessary to start investing with a clear time horizon, and remain committed to this. For example, an individual who begins investing in equity funds through an SIP, with an unflinching commitment to continue this process for the next 20 years, would find it much easier to handle intermittent periods of volatility.A tentative approach would compel an investor to analyse the situation afresh every year. Invariably, one would end up taking decisions that are driven by emotion and the current market moods, rather than any logic. It is time to re-think this approach, and start following a ‘buy and hold’ strategy to get the best from equities.
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