Are you familiar with the saying “life is a marathon, not a sprint?” While applicable to many things, this saying also holds true in terms of investing. The financial media puts a large emphasis on daily movements within the stock market, and who can blame them? Their job is to grab attention and this is often done by creating fear or celebrating euphoria. However, we believe individual investors are much better off focusing on their long-term investment goals rather than focusing on daily headlines or price movements.
The first step in developing a long-term investment strategy is determining your financial goals. While this question may seem simple, the answer can be complex and challenging for some investors.
Here are some questions to ask to help you narrow down your long-term investing goals:
Once you have an understanding of your investing goals, you should identify an investment objective. A precise way to determine your portfolio’s objective is by defining your growth objective or the amount of money you would like to have at the end of your investment time horizon. Some of the most common objectives we hear from clients include:
To maximize your chances of meeting your investment goals, you should start investing as soon as possible. Not every investor has the ability to invest large sums of money throughout their working years. However, thanks to compound interest, even small amounts can make a big difference over time. Compound interest is the interest an investor earns on previously earned and reinvested interest.
Due to the phenomenon of compound interest, the opportunity cost of not investing your money is increased. Opportunity cost is the missed benefit when an investor chooses one alternative over another. Some of the biggest mistakes younger investors make are neglecting to save or choosing to save their money in a bank account rather than investing in a retirement account. While bank accounts are a great place for holding your money, they often provide very little growth opportunities and likely won’t earn a high-enough return to keep pace with inflation. The longer you allow your money to grow while invested in securities, the better chance you have of keeping pace with inflation and growing your wealth in the long-term.
At Fisher Investments UK, we believe asset allocation is a crucial factor in determining your investment returns. Asset allocation is the proportion of equities, fixed interest, cash or other securities in your portfolio. We believe your asset allocation should be based on your financial goals and your personal situation, such as your investment time horizon, health, income needs and more.
To track your investments over the long-term, you may choose to reference a benchmark to see how you are performing against the market as a whole. A benchmark is an index that tracks a market or part of the market—popular equity indexes include the MSCI World Index for global stocks and the FTSE 100 for UK stocks. Benchmarks can provide a roadmap for portfolio construction and can help you manage risk. In addition, a benchmark also serves as a performance gauge to help you monitor your progress toward reaching your objectives.
Once you have identified an appropriate asset allocation and benchmark for your investment portfolio, you can move on to sub-asset allocation and then security selection. Sub-asset allocation decisions help you choose countries, styles, company sizes and other classifications you should choose from. Finally, while security selection is important, we believe it has a relatively minor impact on your investment returns over the long-term.
Constructing a balanced portfolio can be difficult. Market conditions are always changing and understanding the financial media can be difficult. Working with an adviser to help you research and keep you focused on your financial goals can be beneficial.
It’s easy to let the daily swings of the markets take a toll on you emotionally. Remember, reaching your financial goals can mean choosing a long-term investment strategy and sticking to it—even in the most volatile times. For some investors, the biggest risk between them meeting their investment goals is themselves.
Nobody can avoid all negative volatility and attempting to do so can be hazardous to your financial health. Timing market swings correctly is difficult and determining the right time to get back in is doubly daunting. Rather than trying to time market corrections, we believe long-term investors are often better off riding out the volatility and sticking to their long-term strategy.
It’s difficult to stay disciplined in a volatile global stock market. Dealing with uncertainty around your personal finances can lead to rash and emotional short-term decision making. Fisher Investments UK is committed to educating investors and giving them a better chance of meeting their long-term investing goals. To learn more about Fisher Investments UK, download one of our educational guides or call and speak with one of our experienced professionals today.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.