Long-term investing assists people in buying a house, retirement planning, funding the overseas education of their children and discerning other aspirations that require significant financial resources. Kavan Choksi Japan mentions that long-term investments imply to the assets that an individual or entity holds for more than 12 months. These assets can either be bonds, shares, monetary instruments or real estate.
Kavan Choksi Japan discusses a few factors to consider when attempting long-term investing
Long-term investments are known to have the potential for significant capital appreciation over time. This makes such investments especially advantageous for long-term financial goals like retirement planning and wealth accumulation. When attempting long term investing, people firstly need to think about their key financial goals. Certain goals may require conservative products or strategies like fixed income assets. On the other hand, there are many other goals that need an aggressive approach and hence could include small-cap or emerging-market stocks.
Prior to attempting long-term investing, people also need to understand their investment risk tolerance. The risk tolerance limit must be based on an objective measure rather than an emotional response. Unless one does know their risk limits, they would not be able to understand whether they are taking on too much risk or not enough.
For instance, as the markets crashed in March 2020 amid the onset of the COVID-19 pandemic, a large number of investors sold off a good portion of their equity holdings in a massive bout of panic selling. However, the market rebounded sharply over the next two months. As a result, the investors who unloaded their portfolios ended up missing out on the rebound. On the other hand, investors who managed their risk levels appropriately got the chance to rebalance or add to their portfolios when asset values were approaching discount levels.
Kavan Choksi Japan mentions that investors should try their best to bring balance into their investment strategy, and prioritize diversification of assets. As a stock undergoes a significant decline, it could be either for a good or bad reason. The same principle can be scaled up and applied to sectors and whole asset classes. Hence, it is prudent for investors to diversify and spread their risk across a broader range of instruments and markets. Doing so would help in exposing the investment portfolio to a wider range of potential return sources. In case a segment of the portfolio is under-performing, there would still be a good chance that its other segments are faring better. Typically, a diversified portfolio can provide investors with an expansive range of growth opportunities with something of a built-in hedge.
The biggest enemy of long-term investors is not market volatility. If one is investing for the long term, daily, monthly or even yearly ups and downs in the market will not matter much. In fact, the real enemy of long-term investors is themselves and the inclination to get in and out of the market. Hence, investors must be careful about not letting their emotions cloud any investment decisions.
