Those who are invested for the long-term can expect to enjoy a smoother, less emotional ride provided they can keep their emotions in check – largely because knowing that you’re invested for the long-term helps one to ride out market fluctuations that are endemic to the environment. In this article, we explore the role of time, patience, consistency and investment composure in achieving one’s wealth creation goals.
Firstly, successful long-term investors appreciate that market volatility is perfectly normal and that short-term fluctuations only serve as distractions. History has shown that over the long-term markets move in an upward trajectory and that, while markets may fall, they always bounce back. What this means for those who exit the market on a downturn is that they effectively lock in their losses, interrupt the process of compounding, and place themselves at risk of poor market timing – whereas those who remain composed are well-placed for when the investment tide turns.
Being notoriously poor market timers, many investors compromise their investment outcomes because they are not invested when markets start to rebound, only getting back into the markets once the bulk of the gains have been made. From our experience, investors who monitor every market fluctuation and try to time their investments generally achieve poor investment outcomes. Rather than trying to time the markets, investors should consider how the markets have always behaved and that, despite the short-term market fluctuations, markets have shown movement on an upward trajectory. Steering clear of market timing reduces investment risk by removing the potential for lost opportunities and ensuring that you’re invested for the good days. This strategy is supported by historical analysis which shows that markets never go in one direction continuously but rather fluctuate in response to economic, political and global events – as we can expect to happen in this global election year.
Controlling one’s emotions, especially fear, over the course of this year is going to be challenging for many investors. While the effects of human emotions on investment outcomes are well-documented, no one is immune from making irrational decisions fuelled by emotional and/or cognitive biases, especially when markets respond unwittingly. While intuitively many investors understand the value of remaining invested, emotions often win the day – but lose the win. Investors will do well to remind themselves that the lowest the value of any share can fall to is R0, but the extent to which the value of a share can rise is infinite, and committing to a well-diversified investment strategy designed with a specific goal in mind increases your chances of maximising your returns over the long term.
As a long-term investor, time is one of your greatest allies because the longer you remain invested, the longer your money has to grow as a result of the exponential effects of compounding. Further, taking a long-term view gives you more opportunity to reinvest your profits which in turn increases your potential for further profit, and so it goes on. While this strategy may appear easy, many investors find the patience and abstinence required difficult to comprehend, especially for those with a tendency to take control of situations. Ironically, in the context of long-term investing, doing nothing is a decision in itself – and often the best one with the most favourable outcomes. As Peter Lynch once famously said, ‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.’
Avoiding knee-jerk reactions to short-term market fluctuations is made easier by having a clear set of pre-determined financial goals in place – as focusing on one’s goals can help filter out the short-term noise. That said, when constructing your investment portfolio, be sure to identify a realistic time horizon for each goal and ensure that your portfolio is aligned with that time frame. Staying focused on achieving your investment goals rather than reacting to market volatility, provides time and emotional space to focus on what’s really important such as your family, loved ones, career, business and lifestyle goals. Further, if your long-term investment strategy is aligned with your propensity for risk, your portfolio is unlikely to be exposed to more risk than you’re emotionally capable of handling.
While sticking to one’s investment strategy is critical for long-term investment success, keep in mind that regularly reviewing one’s portfolio and recalibrating where necessary is important for ensuring that your strategy remains aligned with your objectives. For instance, if your investment strategy is designed to provide you with a comfortable retirement at age 65 and you subsequently decide you would like to retire at age 60, you would need to recalibrate your strategy taking your reduced investment horizon into account. Alternatively, if you find yourself underfunded for retirement, you may need to delay your retirement date, adjust your risk exposure and set your strategy on a path to achieve a postponed retirement.
It goes without saying therefore that the principles of patience, consistency and composure for the bedrock of long-term investing. By exercising patience, investors can weather the storms of market volatility and allow their investments space to grow. Consistency in adhering to a well-thought-out investment strategy ensures that decisions are based on sound principles rather than impulsive reactions to market conditions. And finally, maintaining composure in the face of uncertainty can prevent emotional reactions that serve only to derail long-term investment goals. Embracing and optimising these three tenets can lead to successful wealth accumulation and financial security over time.
