PATIENCE IS A VIRTUE, BUT HOW LONG IS LONG-TERM?
If you’re accustomed to reading blogs about long term investing, you won’t be a stranger to the importance of adopting a long-term mindset. People naturally worry about how major global events such as wars, elections and virus outbreaks can negatively impact their investments. It’s in these tense times that professionals try to quell panic and remind people that investing is a marathon, not a sprint. Essentially, the name of the game is long-term thinking.
But, how long is long-term?
Generally speaking, the actual time-frame of a ‘long-term’ investment, otherwise known as your ‘investment horizon’, is very much dependant on the individual investor.
IT’S ALL ABOUT HOW BADLY YOU NEED IT
First, when do you need your money? Ultimately, you’ll want to access your money at some point so knowing when you want to do this can help planning from the outset. For instance, are you investing for a specific project within the next few years? Or something beyond several decades?Second, think about your objectives. Are these specific and something you can budget for (a year of travel, a holiday home purchase etc)? Or something more generic, like retirement?And third, how much risk are you willing to take on? This is crucial and can not only dictate the kind of investments to include in your plan, but the length of investment horizon that is required. The longer an investment horizon, the more time there is to recoup losses, whereas the opposite is true for shorter time-frames. Short-term investing can mean large gains, but also equally severe losses.Long-term investing is less flashy and means gaining exposure to gradual and durable trends that reward patience over time. Theoretically speaking, someone in their 20s with no dependents can afford to take on more risk in their investments than a person nearing retirement with children and grandchildren.
DIFFERENT APPROACHES FOR DIFFERENT TIME HORIZONS
The way your portfolio will be constructed will depend on your objectives and, in turn, this will also dictate how long it should be invested. Are your objectives better suited to a portfolio weighted towards equities, benefitting from the long term risk and reward profile of stock markets? Or do you have objectives that would result in a weighting towards fixed income, which could have a lower volatility over a range of time horizons?There are numerous considerations to make when it comes to picking investments and deciding how much risk to take on. Understanding an investor’s time-frame can play a large role in this.Here, a qualified financial adviser can demystify the issue and help you realise what your investment horizon is and how this then plays into your own financial plan (as well as dictating the nature and role of your investment strategy in general).At London & Capital, we work with all our clients to understand why they are investing and when they need their money, which helps us determine how long-term their investments need to be. If you’re curious about what long-term means for you, please get in touch with the team today.