Looking to The Long Game:
Download: Looking to The Long Game
Investing. You need to be in it for the long game – you’ll have likely heard us say it time and again. And although it’s a simple concept, it’s rarely easy. People often eye us with the arched eyebrow of suspicion when we say that investing is ‘emotional.’
True, you may cry at the thought that your investment might not realise the rewards you had hoped for, or you might be turning cartwheels if they exceed your expectations. But, are you prepared for the rollercoaster of anxiety, excitement, disappointment, relief, and joy that it can bring?
The decision to invest requires foresight, discipline and a good understanding of how you ‘feel’ around your money. So, let’s take a look at the basics to get you started:
- Think about how much you want, need and are able to invest. Then consider what proportion of this you might want to invest in equities – these are typically drivers of positive portfolio returns. Over the long haul, this can help to fund future goals, so it’s important to get this bit right at the very start!
- Look to the bigger picture and decide what the broad structure of your portfolio will look like. You will probably want both equity and bond components, but you will also want to explore the many opportunities within each to see which suits you best. People looking for equities usually find the structure of the global markets a good starting point. This helps define the basic country, sector and company splits and gives good prospects for diversification.
- Finally, you need to make some choices. There will be a plethora of funds available that will help you implement your strategy, but you’ll need to pick the ones that will work best for you and what you want to achieve. This is the starting point of many DIY investors – we’ve all seen the ‘best buy’ fund lists in the Sunday papers! And it’s here that the fun and danger starts!
Did someone say Danger?
There are indeed traps people often fall into when it comes to investing alongside not looking at it as the long game it is. Here are three of the most common!
The illusion of short time frames!
Some funds can have great looking track records when measured over short periods (3 years). It’s easy to identify a fund that has done well in the immediate past. But, it’s much more difficult to pick one that will do so in the years ahead.
Recognising that markets fluctuate!
That’s right, it’s normal for the markets to go up and down. So, different parts of the market do well at different times. But, the reality is that no one knows who the winners will be – and no one can time the market, not even professionals. All too often we hear more naïve investors taking good short-term performance as a sign of skill. It can be a really dangerous trap to fall into.
Mistaking Luck for Skill
This one sounds mean, but it’s true. Many a short term ‘good’ performance has simply been the result of luck. To put this into context, you’d need at least 16 years of performance data to be 95% certain that skill was the driver of your over-performance. You really can’t tell much at all from three to five year performance records when it comes to identifying good funds. Yet that is where best-buy lists tend to focus.
In short as the caveat has stated for some years now:
‘Past performance is no guarantee of your future return, and you may get back less than your original investment.’
So, what can you do?
The key to investing is to capture the market return with well-diversified, low-cost funds. Drowning out the noise from best-buy lists and short-term performance will take some practice – but it remains the safest approach for the foreseeable future. If you’re worried about going it alone though and would like some help to get it right – do get in touch. We’re experts in the long game and we’d be only too glad to see how we can help!
Written by Ben Griffiths
Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.