“The stock market is a device to transfer money from the impatient to the patient.”
— Warren Buffett
The equity market is volatile in nature, which is something that scares people. They either choose to not invest in it altogether or go for the other option, which is making short-term investments. Short-term equity investments are those that are for a period of less than a year.
It is well known that equity investments generate the highest returns in terms of long term investments, which is why investing for short-term gains is not only the less sensible option but it can also lead to financial loss of capital. Since the market is volatile, people may feel tempted to drop their investments and pull back on them when the stock market takes a downturn. But, unless there are extenuating circumstances, the market will stabilize and the stock will eventually rise based on how smart your investments have been.
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
— Charlie Munger
By definition, a long term investment is an investment in equity that crosses the minimum duration of one year. But the meaning behind what a long term investment could differ from person to person, based on when they have started investing.
Your equity investments are often tied with the financial goals you want to achieve, so you should adapt your definition of a long-term equity investment based on these goals. If you start investing in equity for the purpose of your child’s education, then you should consider your long term equity investment to be for about 18 years till they reach that age. If you are investing at the age of 25 and the purpose is retirement, you should consider your long term investment to be about 35 years, or till the time you retire.
These aren’t hard and fast rules, but they do help you adhere to a certain timeline and avoid any panic induced back-outs on your investment.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
— Paul Samuelson
So if you are starting out on your long term investment journey, you should ideally forget about making short term gains and focus on the long term returns you will get on your investment. If you are on this road, you should be prepared to stay on it for the long haul.
Long term investment in equity requires adequate planning to keep you prepared for any circumstances. You should not have to break your mutual funds before they mature, or sell your shares, or even break any bonds you might have created in advance because of a personal financial crisis.
If you have invested a certain amount to benefit from their long term returns, you should be able to forget about that as a source of income till your investment has reached its duration period. So what are some of the tips you should keep in mind to help you plan your long term equity investments better?
Let’s find out.
“Just like a doctor wouldn’t write you a prescription without diagnosing you first, an investment portfolio shouldn’t be recommended until a client has gone through a comprehensive financial planning process.”
— Taylor Schulte
You need to know how much your income is, what your investments are, how much you want to save in case of any additional unplanned expenses, and what your investments are going to be like. This can be possible if you create a financial plan and build your equity investments around it. Work with a financial planner or investment advisor to understand more about your existing finances and your capacity to invest.
The second step is creating a strategy around your long term investment in equity. You need to set the goals of your investments, how much you are expecting in returns, and what the purpose is behind your investment. This will help you create a solid strategy based on your financial plan when you are building your long term investment portfolio.
There is only so much money you have every month, and you still need to have some left for your monthly expenses, paying your bills, miscellaneous expenditure, tuition fees for your children, and more. So the money you have allocated for your investment plan needs to be placed strategically to help you meet all the financial goals you have set out to achieve earlier. It’s always wise to diversify your equity investments so that you are also diversifying your risk, thereby reducing the chances of you facing any financial losses on your investments. An investment advisor will be of great help in this stage of your long term investment journey.
Invest in long term stocks which are normally in blue chip companies, which will have guaranteed returns no matter how high the current stock prices are. You can also invest in relatively stable mid-cap or small company stocks that can guarantee long term returns in the future. If you have a larger risk appetite, your investment advisor can also suggest you to invest in some growth stocks or value companies that are expected to experience further growth in the future.
There are other forms of equity investments that don’t involve trading in the stock market. You can also choose to invest in mutual funds and ETFs (exchange-traded funds). This way you will be able to invest in a variety of traded stocks and funds by reducing the cost of your investment. It is a more affordable option with a wider reach.
Trading and long term investments in equity vary based on the financial goals you want to achieve. If you want quicker returns and want to use the volatility of the stock market to your benefit, short term investments and trading will make more sense than long term investment in equity. If your goal is to build wealth over a period of lifetime, you should invest in building a thorough long term plan for your investment in equity.
Financial planners and investment advisors get a better understanding of what you want out of your investments before they help you chalk out an investment plan for your portfolio. But one thing you should always remember is that long term rewards are better than short term investments in equity. So even if you feel like you can make more profit with short term investments, since the market is so volatile, you stand the chance to lose a lot more with this plan. Long term equity investments, on the other hand, are a lot more stable, and the market is a lot more stable if you compare it with a 30 year old trajectory and a 3 month one.
In the words of Warren Buffet, “The stock market is a device to transfer money from the impatient to the patient.”