Advice for long-term investing – Forbes Advisor INDIA
Investment gambling is akin to testing cricket. You need patience, discipline, perseverance, planning and a strong determination to win. Like a test match where victory depends on the number of sessions won by a team, the investment calls for winning the small battles of the journey to succeed in the end.
Long-term investment mandates instilling these attributes. Whether you want to build substantial retirement capital, accumulate funds for your child’s college education, or fight inflation, long-term investing is the way to go. How to do ? Let’s find out.
1. Know your financial goals
Before embarking on long-term investing, have an overall view of your financial goals. The ultimate objective of any investment is to achieve a goal. Therefore, unless you have a clear understanding and vision of your goals, you are unlikely to succeed in the rigors required to invest for the long term.
Divide your goals into three broad categories: short, medium, and long. While short-term goals have a time horizon of six months to a year, medium-term goals typically take three to five years to complete. On the other hand, long-term goals have a time horizon of more than ten years or more.
Once you know the goals, you can estimate the money needed to achieve them. This will help sort out your finances and, more importantly, motivate you to save and invest for them. So go back to the drawing board, write down your life goals, take stock of the finances, and get started.
2. Start investing early
As long-term investing requires discipline and patience, it is essential to start early. An early start imbues financial discipline and involves capitalization. Capitalization has a multiplier effect on wealth creation. It also helps you accumulate a larger corpus.
For example, if you are 25 and want to retire at 60, a Systematic Investment Plan (SIP) of INR 5,000 in a mutual fund offering annualized returns of 10% will help you get a body of INR 1.9 crore. If you delay the investment for five years, the corpus will be INR 1.13 crore.
Therefore, being an early riser has its perks. This gives your money more time to grow and allows you to ward off inflation.
3. Invest in instruments that have a long lock-up period
Another way to stay invested for a long time is to invest in instruments with a long lock-up period. Lockdown serves a dual purpose. It does not allow premature withdrawals and allows capitalization to take effect. Some instruments such as the Public Provident Fund (PPF) and the National Pension System (NPS) have long-term lock-ups.
15 years is the PPF lock, while the NPS locks funds until you reach 60. The first, however, allows premature withdrawals under certain conditions. However, it is in your interest not to withdraw unless absolutely necessary.
In the NPS, you can withdraw 60% of the corpus as a lump sum when you reach 60 and use the remaining 40% to purchase an annuity plan that will give you a pension. Another financial product you can consider investing in is a unit-linked insurance plan (ULIP). ULIPs offer the double benefit of insurance and investment in a single product and are valid for five years.
However, to maximize the gains from ULIPs, you need to stay invested for a long time, beyond five years.
4. Invest in stocks
Stocks are volatile, especially in the short term. However, they can be just as rewarding and have the potential to generate returns that exceed inflation over the long term. Panic and exit following short-term market fluctuations can convert theoretical losses into real losses.
The allure of earning inflation-indexed returns from stocks keeps many investors attached to their investments for long periods of time. And they are also rewarded for it. For example, when markets plunged in March 2020 after Covid-19 was declared a pandemic by the World Health Organization (WHO), many investors remained engaged despite their returns in the red category.
Their persistence eventually paid off, with markets recovering surprisingly well. Yields soared and soon investors were sitting on sizable gains. Investing in stocks also builds patience to stay committed for long periods of time.
5. Ignore market noise
Markets are full of opinions and views that seem to fly in droves and fast, especially when things go a little wrong. Suddenly, you will find that everyone becomes an expert and shares opinions. To invest for the long term, you need to ignore the noises because they end up being distractions that can interfere with your goals.
Consult your financial advisor, who understands your financial plan, your positioning and your objectives if the situation requires it. More often than not, market noises force investors to act on impulse, resulting in erroneous investment decisions. Therefore, look at the big picture and stay committed to your goals.
While individual brilliance can help you win a game or two, it takes collective effort to win. The same is true for long-term investing. You cannot or rather should not depend on a single financial instrument.
Diversify your holdings across different asset classes – stocks, bonds, gold, among others – and also within an asset class. For example, within stocks, divide your investments into large-cap, mid-cap, and small-cap funds. Diversification will provide stability to your portfolio and balance risk and reward.
Optimal diversification is an effective risk hedging strategy. A fundamental investment principle, optimal diversification also increases returns because market events affect each asset class differently.
Long-term investing requires periodic review. This is because situations change over time. The review will help you weed out laggards and tailor your investments to your goals. Long-term investing has multiple advantages. Making the right choice can help you stay on a solid financial footing and be on the path to financial freedom.