Investing does not have to be complicated. It requires an understanding of basic concepts and recognising and seizing the opportunities that arise. This column will give you the tools you need to invest in the future. What would you like to know about investing? You can email us at firstname.lastname@example.org
There is a saying that long term investments are the best choice for the tolerant! As it comes out from their name, long term investments are investments, which are made for a solid period of time and could span five to ten years.
For instance, crossing the threshold into retirement, planning for your children’s education needs as well as realizing your dream of opening your own business calls for long-term strategies or you could end up in a heap of trouble. Short term investing does not allow for long-term goals; statistics show that most people with short-term investment horizons tend to experience the greatest losses because they are generally greedy and out to make a quick buck.
As a long term investor, you must remember that time can become your best friend – or worst enemy if you wait too long – because it gives compounding time to work its magic. The concept is this: When you invest money you earn interest on your capital. The next year you earn interest on both your original capital and the interest from the first year. In the third year you earn interest on your capital and the first two years’ interest. You get the picture. The concept of earning interest on your interest is the miracle of compounding.
So the earlier you start investing, the more time you leave for the miracle of compound interest to take effect. Someone who invests $100 a month from age 20 to 29 and then lets their investments grow is likely to have more money at 60 than someone who invests $100 a month from age 30 to 59. You have to exercise patience if you want to feel the full benefit of compounding.
Another reason to consider investing for the long term is that it can help buffer against inflation, a silent thief that quietly reduces the value of your savings. What inflation means to investors is this: the buying power of your cash savings is significantly reduced over 10 or more years. If you want to protect your savings against inflation over the long term, then equities, bonds and mutual funds managed by professionals are your best bets.
“Whatever one’s views on short-term prospects for the market, a well-diversified portfolio remains a good hedge against inflation," stresses Gayle Daniel-Worrell, Vice President, Marketing, Communication and Distribution Channels at UTC. “For those looking to minimize volatility, mutual funds are the best bet. These are more diversified, reduce risk, and enables you to make regular savings rather than just deposit a lump sum. This can help smooth out the ups and downs of the stock market.”
Now is the time to review your investments to ensure that they’re diversified for long-term growth. It could result in thousands of extra dollars in earnings over time.
As a long-term investor, you shouldn’t panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. The most important thing to remember is that the longer you put off making long-term investment decisions, the more money you may be losing.
Here are some simple rules to help you navigate the market for the long term:
- Take the long view. You are in this for the long term, so do not follow fads and fashions. Diversify in a sensible way. Do not panic when markets occasionally slide. As such, you need a long-term investment instrument such as the UTC’s Universal Retirement Fund and Children’s Investment Starter Plan (CISP), respectively, to assist in reaching your long term goals.
- Diversify. Spread your risks by investing in a number of instruments in different markets and in mutual funds, bonds and other instruments. A good rule is that no one stock or other investment should be more than 10 percent of your total portfolio. This should give you protection against a collapse in any one particular sector.
- Reinvest dividends. A surprisingly large part of the overall growth in most portfolios comes from reinvested dividends rather than in appreciation of the stock prices. If you are for the long haul, it’s a good game plan to reinvest the dividends.